Spike in Auto Leasing Hints at Future Used Car Bargains
By: Jeff Brown

NEW YORK (sbup) -- U.S. car sales are starting to take off, driven in part by a growing interest in leases.

Quick quiz: this trend means you should:
 
A)   Lease now
B)   Buy now
C)   Keep your current vehicle a few more years
 
Let’s go with C, assuming the current vehicle is safe and won’t cost a fortune in repairs. Car owners who postpone their next purchase for three years or so may find a flood of relatively low-mileage used cars driving down prices, courtesy of all those leases being written today.
 
The three-year-old vehicle sits in the sweet spot, typically selling for around half its original price while having at least three quarters of its life ahead of it. Because today’s vehicles are so good, you’re likely to find a three-year-old still has many maintenance-free years left.
 
Car experts say the surge in leases is the result of a push by manufacturers to minimize lease payments to boost business.
 
Monthly lease payments are largely based on the leasing firm’s expectations about vehicles’ future values, since the dealer will sell the vehicle after the lease expires. The more the dealership expects to get on the used market, the less it needs to charge for the lease.
 
All that suggests that vehicles coming off lease in three years will be expensive. But it’s also possible that the dealers and manufacturers are indulging in a little wishful rationalization so they can move more cars now. The rational argument -- that vehicles now hold their value better because they’re better made -- may be overwhelmed by the law of supply and demand, with big supplies keeping prices down when today’s new leases end.
 
In the first four months of the year, nearly 20% of new cars left dealers’ lots as leases, up from less than 13% in 2009. Leasing used to be most common with luxury cars, since it helped keep monthly payments within reach. But now more and more less-expensive vehicles are being leased. That promises a broader selection for used car buyers down the road.
 
Of course, supply and demand is very hard to predict. While vehicle sales are growing, they remain well below the peak preceding the financial crisis. If the economy recovers, demand could soar enough to offset the benefits of having an abundance of leased vehicles for sale. Changes in interest rates or fuel prices could also affect demand.
 
But the patient buyer has an ace up his sleeve: Unless your current vehicle is really on its last legs, it probably makes financial sense to keep it regardless of what used car prices will be in three years. While maintenance costs do grow as vehicles age, they may well be substantially less than payments on a new purchase or lease.
 
Leasing appeals to people who want to minimize monthly payments or feel they simply must drive relatively new vehicles. On a purely financial basis, leasing is the most expensive way to drive, since you never get free of monthly payments.

—For more ways to save, spend, invest and borrow, visit MainStreet.com.

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