Whatever you do, don’t rent a car now

Whatever you do, don't rent a car now

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It’s a bad time to buy a new car – if you can even find the vehicle you want, you’ll probably pay above sticker price to get it. But it’s a very bad time to rent a new car. AAccording to Tyson Jominyvice president of data and analytics at JD Power, it is, in fact, an “incredibly bad time to rent,” and it’s likely to continue for the foreseeable future.

Reduced incentives to lease new cars

Lower monthly payments for leased cars used to be a major selling point for those weighing leasing versus buying, but that calculus has changed. Back when computer chips were readily available, auto leasing companies used to offer substantial incentives to customers, but with declining fleet supply caused by global supply chain issues, those incentives are rapidly diminishing. According to J.D. Power, the average leasing company now offers around $1,500 in incentives, up from around $4,000 pre-pandemic. But a higher total cost isn’t the only reason you shouldn’t rent right now.

Fewer miles for your money

In addition to offering lower incentives, auto leasing companies are reducing the number of miles customers can drive without incurring penalties. A few years ago, the industry standard was 12,000 miles a year, but now many leases only offer 10,000. If you go over your limit, even if only at the previous maximum, you’ll likely be charged around 30 cents per mile, adding $600 to the price of a lease that was probably already more expensive than it would have been. been a few years back.

Depreciation and you

The current shortage of purchasable cars has caused the value of used cars to skyrocket – the price of a The American-made car of the last five years is about 30% higher than a year ago. You’d think that less depreciation would translate into cheaper lease payments, but leasing companies aren’t lowering rates, and with a widespread car shortage, they don’t have much incentive to start.

Here’s exactly how bad of an idea it is to lease rather than buy a new car this year

This Ari Janessian videoa car broker with Trading guidesbreaks down the numbers for leasing versus buying a 2022 Toyota RAV 4, and once you see it in black and white, it becomes clear how “unbelievably bad” leasing has become.

The RAV 4’s MSRP is $35,000, plus shipping and taxes. If you financed at Toyota’s 2.49% interest rate (the incentive that Toyota is currently offering) and only reduced taxes and fees, you would have a monthly payment of $621, resulting in a cost total of $37,260 (plus taxes and fees). Five years from now, the RAV 4 should be worth around $21,000 (assuming a 40% depreciation) on the open market, so the total cost of ownership for that time would be around $16,260.

If you were instead to lease a RAV 4 for 36 months, and again only put in taxes and fees, you’d pay $471 per month (assuming 4.68 APR). In only Three years, your leased RAV 4 would cost you $16,956 (plus taxes and fees), in which case you’ll have to return it or buy out the lease.

In both cases, for an expense of around $16,000, you can either drive a car for five years if you finance it, or three years if you lease it. “You have two more years here,” says Janessian. “Terrible, terrible idea to rent a car right now.”

Different cars have different resale values, of course, and funding rates and incentives also vary, so these the numbers won’t apply to everyone, but the trend is clear.

If only you had a time machine

If you rented a car in 2019, congratulations! You made a very good decision. But make sure you don’t just return your car at the end of your lease…the average value of a 2019 vehicle is $7,208 more than its projected residual value, so if you buy your car when your lease is up, it will be a theft. The price difference is so big, some people are even sell their leases at a profit.

How long will this last?

It’s unclear how long the car shortage will last. While the shortage of computer chips begins to ease and auto inventories are gradually filling up, a backlog of consumer demand will likely keep rare cars on the lots until the end of 2022, according to industry analysts.