Will car leasing become the best option?

By | 13th March 2017

If-you-must-lease-a-car-save-the-cash-first

At present, the best options for minimising motoring costs are:

1=) Buying a 3-year-old car and running it to 9 years old.

1=) Buying a 8-year-old car and running it until it fails (surprisingly, you are not actually saving any money running a ‘old banger’, due to the significant running cost increases over a newer car.)

2) Buying a car new for cash (discounted from the list price through a broker) and running it for at least 6 years

3) Leasing a car for 2/3 years.

However, over the last year, I have noticed several trends:

– The list price for new cars has increased significantly.

– With nearly 90% of people buying cars on finance, second-hand prices have been rising. This is due to cars coming off lease and going back in the network to be sold again – indeed some car leases do not even allow you the option to buy the car at the end of the lease.

– With increasing complexity, lighter weight components, and higher replacement costs; the chances of running a modern car to ‘old age’ appear to be reducing.

With these factors, I believe we could reach a point in the future where the only sensible option becomes car leasing. Indeed, several manufacturers have talked about how the market will change in the future and move away from purchasing.

However, there is a significant downside to leasing that many people don’t realise –

When you sign a lease you could be liable for all or most of the future payments until the end of the lease.

However, there is a simple solution… simply save all the lease payments in advance and think of that as ‘buying’ the car rental for the lease term. That way, no matter what happens, you don’t have to worry about making lease payments for the term.

Due to the way leases work, you may want to leave the lump sum in a bank account so that the monthly payments can be taken over the term – rather than pay all of it out upfront.

You would also start saving payments towards your next lease as soon as you take one out, so it is only the first lease that you have to delay while you save the advance payments up.

The few years it takes to save up the initial lease advance would be well worth all the worry it could save you in future.

After building up 17 years experience in industry and practice, James started his own business from scratch in 2006. He now helps others to do the same, while minimising both the risks and costs. James is dual qualified in tax and accounts, and has won multiple awards for small business. In 2014 he was invited to Downing Street, as one of the Small Business Saturday 100 winners.

2 thoughts on “Will car leasing become the best option?

  1. Steve from Arkansas

    Studies I’ve heard indicate car leases equate to a 14% interest rate on the value of the car. I can’t see how that could possibly complete with any used car scenario. Also I don’t buy that any new car scenario could compete with any used car one considering the non-linear depreciation rates on cars. I’ve been way past FI for years, retired and still buying used cars. But I do believe you have studied this more than me and truly know your stuff so I’m perplexed.

    Reply
    1. James McBrearty Post author

      Hi Steve, yes it’s crazily complex now when in the past buying a car was just a simple decision.

      In the UK at the moment we have car leases where there are big discounts on either the purchase price(through a finance contribution) or a high residual value. If you pick a model that isn’t a popular one, or just before a new model comes out, then there are even bigger discounts as they want to get them moved – that means you can actually lease a brand new car for less than the depreciation on an old one in some cases.

      At present, buying a 3 year old car is still the best way to reduce costs: http://jamesmcbrearty.com/how-to-minimise-your-motoring-costs/ as no matter what you buy, it will likely lose 50% of value in the first 3 years.

      There is quite a big difference in what a car is worth when selling compared to what it costs when buying. The increase in buying costs from dealers mean that a calculation has to be done each time.

      When looking at cars, it’s important to research depreciation rates and leasing costs for the particular model you are interested in – they are different for each car.

      Leasing a bottom of the range budget car can actually cost the same as an executive one, it is all to do with the residual values and any contributions up front.

      I used to run an old Honda Accord – you could easily run one up to 15+ years old and 200k miles without problems, but new cars such as hybrids can cost a huge amount when they are over 11 years old – sadly meaning that modern cars can become throwaway items. Some models even have plastic radiators/etc. so have a limited lifespan. In the UK our consumer laws effectively say a car is ‘worn out’ after 6 years now – making problems with older cars more of an issue.

      Maintenance costs on modern older cars are significant, much of it due to emission control systems that wear out and need replaced. With other systems being made of light weight materials their lifetime is also much reduced compared to the older more substantial parts.

      Here in the UK we have an annual MOT after a car is 3 years old, which is a check of the car and componenets for safety and emissions. If the car needs something replacing, that is an expense that has to be paid to keep driving it.

      If people are leasing over 2 years then they don’t have to worry about any of these expenses and hand the car back before it requires repairs.

      Reply

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