Why buy when you can rent? In a still-shaky economy, drivers are increasingly deciding that renting is the way to go.
LeaseTrader.com, which matches car shoppers with individuals looking to escape their auto leases, says its marketplace is processing the highest-ever rate of first-time lessees at 25.8%, as of July 1.
"What we're basically seeing now is, instead of one out of every five people leasing, we believe one out of every four are leasing. In the world of automotive, that is a very significant uptick," says John Sternal, spokesperson for LeaseTrader.com.
"I think it means the world is truly headed right now towards a lease/rental mindset. You look at everything that's taken place in the past five years, especially in the housing industry. It's quite possible that gone are the days of people and families making plans to stay in the same house or car for any length of time, especially if there's no confidence that it's going to be a wise move for your money," Sternal says.
Plenty of people are afraid to buy -- even when they can afford to -- because of a loss of financial confidence. Just as many people are unsure how much their homes will be worth in 10 years and are opting to rent housing instead of owning it, Sternal says.
There's more to it, though. There's also consumers' desire to change vehicles more frequently. "Today we're building our cars much like mobile phones," Sternal says. "Every few years there's major advances in features and even gadgets inside the car. And like our thirst to have the latest version of the iPhone, people want the latest version of automotive technology every couple of years."
The recent increase in leasing also may be due to the low annual percentage rates. People with good credit can probably lease a car for 2.5% or 2.99%, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. "Leasing is a good idea for someone who likes a new car and trades every two to three years," she says. "The car remains in warranty the entire time, and you don't have to worry about the hassle of selling it. You're basically buying peace of mind."
And leasing is no longer just for luxury import vehicles, either. Today, drivers can get tremendous lease deals on hybrids and small fuel-efficient domestic vehicles as well, Sternal says. Car makers now realize that virtually every demographic wants to lease every kind of vehicle, which is why 95% of all the vehicles advertised on television are promoted with lease deals.
For first-time lessees, the top five most popular vehicles on LeaseTrader.com are BMW 328i, Audi A4, Toyota Corolla, Honda Civic and Chevrolet Equinox.
Then there's the financing. Car loans are harder to get and more expensive after the financial crisis, and for some, leasing payments are just cheaper.
John Martinka, a partner with business consultant Partner On-Call in Kirkland, Wash., recently signed a three-year lease for a Lexus hybrid sedan. He says his finance charges were actually a little less than what he would have gotten for loan financing to buy the car, and the $5,000 down payment was "completely flexible."
"The three-year term for either buying or returning the call was a big plus because we got a hybrid," says Martinka, who pays a bit less than $700 per month for the $42,000 car. "I'm expecting that hybrid technology will improve in the next few years and I want the option to turn this car in and get a more efficient one."
When he analyzed his options, Martinka found it was actually more favorable for him to lease. "The residual on the lease and the balance after three years on the loan were comparable, given the payment difference," says Martinka, who is leasing for the first time. "What wasn't favorable was a four year lease. It made no sense to do that. I asked and they said three years is the sweet spot for the car company because of reselling it if I don't keep it." A five-year loan would have cost him $75 to $100 more per month, he says.
Manda Hunt, president of Lenox Communications in Atlanta, has always bought her cars, but is now realizing that it's in her best interest to lease. "I get tired of my car after a few years," she says. "I will never pay one off entirely and be without a car payment. I work from home a lot and don't put many miles on my car. I am focused now on reducing monthly expenses and being able to put more away. Leasing, I believe, will enable me to have a similar level of quality car with lower monthly payments."
If leasing suddenly sounds like an option worthy of a second look, here's what first timers should know.
1. Know It's Not Yours
"People misunderstand the finer elements of leasing. It's still someone else's car (the bank's), and the contract can be a harsh reality if you don't stick to the terms of the contract," Sternal says.
2. Avoid miscalculations
If you go drive more than your contract allows or fail to properly maintain the vehicle, it can cost you a lot of money. Be smart about miles. If you're pretty sure you're going to go over the miles specified in your contract, it's better to prepay for extra miles upfront, Sternal says.
Forgetting to calculate the rise in your insurance premium for your new wheels also can throw your budget out of whack, Sternal says. Insurance costs for a leased car can be higher than for a bought car, so always check out insurance estimates for the car you're considering to find out how your monthly premiums would change.
Finally, watch out for disposal fees at the end of the contract, Cunningham says. Find out if they can be waived if you release the car from the same dealer.
3. Protect yourself
Cunningham also advises taking detailed pictures of the car when you turn it in. If the dealership wants to keep some of your deposit for excessive wear and tear, you may need pictures to help argue your case.
Just because you're not buying doesn't mean you can't negotiate the price. "The price you arrive at will determine your lease payment," Cunningham says. "You can also put money down to lower the monthly lease payment, but, of course, you wouldn't want to put too much down since you'll have nothing to show for it when the lease expires."
5. Find out what's included
Ask whether the monthly payment includes sales tax and make sure you're clear on the down-payment requirements, which can include bank fees and a security deposit.
6. Make sure your lease is transferable
Even if you sign a lease for just three years, drastic life changes can occur within that window. "Having the ability to transfer out of that lease contract if you get a job relocation to Europe or decide to have a new baby can save you a lot of money in early termination fees," Sternal says.
7. Do the math
Leasing still doesn't make sense for everyone. "While leasing allows you to drive a more expensive car, it also potentially costs you more in the long-run because you never build equity in a vehicle," says automotive expert Karl Brauer, formerly of Edmunds.com. "Instead, you essentially rent a car for two to four years and then start over with a new rental versus buying a car, paying it off and selling it to help pay for the next one."
Leases of more than five years have the same disadvantage as getting a 30-year mortgage versus a 15-year mortgage -- you're paying interest forever, says Harlan Platt, a finance professor at Northwestern University. "Owning and holding a car for 10-plus years is the best strategy, though leasing is probably as good as owning if you use a three-year lease." Three years is the sweet spot, he says.
Jack Nerad, executive editorial director for Kelley Blue Book, advises drivers not to concentrate only on the monthly payments. "Make certain you really want to have the car during the entire lease term," he says. "Leases are difficult and expensive to get out of." Finally, he adds, don't lease a car past the time when its factory warranty coverage runs out.