March/April 2022 Issue
Thinking about a new car? While financing decisions are as uniquely personal as the purchasers themselves, buying usually beats leasing—even if you have to take out a loan. And that’s especially true in 2022.
Pandemic-related disruptions in supply and demand have depleted auto inventory and sent prices through the roof—and leasing has become even less popular. Only 23 percent of new cars were leased in December 2021, down from 31 percent in December 2019, according to the auto website Edmunds.com. With new cars practically driving themselves off the lot, dealers have less reason to incentivize leasing.
“Among luxury buyers, people tend to lease, rather than buy,” but with interest rates so low, “many will purchase rather than leasing,” says Ronald Montoya, Edmunds’ senior consumer advice editor. Others say leasing has dropped off because with new- and used-car prices so high, more people are extending their current leases or buying their car when the lease ends.
Still, there are reasons to lease, and it may be right for you. We break down the finance options to help you decide.
Buying with a Loan
When you finance the purchase of a new car, you make a down payment and then repay the rest over time. The average time until payoff is 5.5 years, according to Bankrate.com. Monthly payments include interest and principal.
The larger your down payment, the less interest you’ll pay over the life of the loan. When the loan is paid off, you own the car and have an asset you can keep, sell, or trade in.
Entering a Lease
With a lease, your monthly payment will include the difference between the car’s purchase price and its residual value—meaning its predicted market value at the end of the lease—spread over the term of the lease, typically three years. You are essentially paying for the car’s depreciation over the first three years, when it depreciates the fastest.
Making a larger up-front payment reduces your monthly payment but does not reduce what you’ll pay over the life of the lease, so Montoya recommends making the smallest up-front payment possible.
In addition to the depreciation charge, your monthly lease payment will include an interest charge (called the money factor or rent charge) and pro-rated sales tax.
The lease comes with a limited number of miles, typically 10,000 to 15,000 per year, although you might be able to negotiate more.