New cars aren’t cheap. In October 2019, J.D. Power projected average transaction prices to top $34,000 for the first time ever. That’s up nearly $1,300, or about 4%, from a year prior. Experian pegged average payments on those rides at $550 a month in the second quarter; that’s up $25, or nearly 5%, year-over-year. Either increase far outstrips average income gains. However you slice it, the price of a new car is ballooning faster than the paycheck to cover it.
Related: How Does Leasing a Car Work?
What’s a consumer to do? About a third turn to leasing, where lower monthly payments trade equity for affordability. But many shoppers simply buy used cars, which outsell new ones by more than 2 to 1. Could you score the best of both worlds with a used-car lease?
In a word, yes. But it’s complicated.
Used-car leases are rare but increasing. Experian pegged them at 4.14% of all used-car sales in the second quarter of 2019 — or about 1 in 24 used cars sold — but that’s up from 3.55% in the year-ago quarter. Like new-car leases, used-car leases typically hold the promise of lower monthly payments. But notable downsides exist, too.
Don’t expect to see dealers or automakers blare monthly lease rates on used cars. You can take over someone else’s lease through services like LeaseTrader or Swapalease, but shoppers who want to start a lease anew will want to approach the dealer on a target car to see whether a lease is even possible. In many cases, such programs come only on certified pre-owned vehicles — late-model used cars that undergo refurbishing and get an extended warranty to sell as a sort of premium used.
Indeed, the National Automobile Dealers Association notes that 24 brands are “known to offer” leases on CPO cars. NADA’s list covers all major automakers, and the organization says major costs on such programs mirror those of new-car leasing.
But such leasing may still require third-party financing. Representatives at Fiat Chrysler Automobiles, Ford and Nissan told us their finance arms generally don’t lease used cars of any stripe. Toyota’s financing arm does, albeit indirectly, by purchasing lease contracts written by dealers. And Toyota only offers used-car leases on CPO models that fall within certain mileage and age ranges — not used cars at large, spokesman Vincent Bray told Cars.com.
Squeezing the Sandwich
Remember, a lease essentially pays what’s sandwiched between the total price of the car, called the capitalized cost, and the expected residual value when you hand back the keys. All things being equal, leasing a used car makes for a skinnier sandwich. On one side, it lowers the capitalized cost because a used car is worth less than a new car; on the other, it raises the residuals because you avoid the steep loss in value over the first years of a new car.
Unfortunately, not all things are equal. A lease includes two more items that affect your monthly payment: fees and interest. Fees can include acquisition charges, dealer-prep fees, disposition fees and a security deposit. Interest comes by way of the money factor, an implied interest rate on any lease (which you can read more on here). Since the rate to finance a used car is typically higher — average spring 2019 rates were 10.07% on used cars, per Experian, versus 6.27% for new — expect the money factor on a used lease to run higher, too. That’s not always the case, though: Toyota’s Bray notes that the automaker’s financing arm “periodically … offers special lease rates on targeted [CPO] models.”
Got it? Don’t fret. If fees and interest add a layer back to the slimmed-down sandwich, consider it a smattering of condiments, not a pile o’ pastrami. The lower capitalized cost and higher residual value should handily outweigh any fees and interest to drive a lower overall monthly payment than financing the same car, let alone leasing or financing it new.
Pay attention to a few other factors. Older cars can rack up repair costs that wreck an otherwise budget-friendly choice. If you lease a CPO car, it typically carries extended-powertrain and bumper-to-bumper warranties to cover some of those unexpected costs, but a multiyear lease could easily outpace such terms. Read the fine print, as unfixed mechanical problems on a vehicle you’re turning in might incur penalties.
For those reasons, you’ll want to examine the car with the same rigor you would any used-car purchase. (Read our advice on the subject.) Scrutinize the vehicle’s ownership history, identify signs of damage or misuse and, most importantly, get a reputable third-party mechanic to inspect the car before you sign any lease. You’re handing the keys back in two or three years, but you don’t want to inherit costly problems in the interim.
You should also note any requirements in gap insurance, which covers the difference between a vehicle’s current value and what you owe on the lease if the car is stolen or totaled. Finally, review any early-termination fees, wear-and-tear charges, mileage limits and options to purchase at lease end.
More From Cars.com:
- Glossary of Car Leasing Terms
- How to Get Out of a Car Lease
- Benefits of Leasing Your New Car
- How Much Does It Cost to Lease a Car?
- Is a Used Car a Good Idea?
Downside Without Upside?
Obviously, leasing builds no equity in your vehicle unless you plan to buy the car for its remaining value at the end of the term. It can still make financial sense in some cases — as a way, for example, to cut your monthly car payment on a vehicle you’d otherwise budgeted to finance. But avoid the temptation to instead lease a nicer car on the same budget. That’s a one-way ticket to the lease treadmill, where perpetual car payments come with no equity or savings to show for it.
This applies to used-car leases, too, perhaps even more so. Lease treadmill or no, the upside of new-car leasing is that you get the latest safety and technology features thanks to having a new car every two or three years. That doesn’t apply to the lease on a used car, where technology is already years old by the time you get behind the wheel. Without equity or the latest technology, a used-car lease appeals chiefly on value — and if your example is particularly old or unreliable, a major repair could threaten even that. Choose accordingly.
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