Uninformed automotive consumers often confuse car leasing and car renting. They sometimes think the two are the same. They would be very wrong.
The confusion is somewhat understandable because of the similarity of terms to that of apartment leasing and renting. Many of us can remember our parents telling us that renting or leasing an apartment was “throwing our money away” and that we should buy a house instead. Until the recent recession, it was true that you could invest in a house and get all your money back, plus more, when you decided to sell the house later. The house “appreciated” in value and was a smart use of your money.
Cars are not houses or apartments, and don’t act the same. All cars, unlike houses, “depreciate” in value over time and miles. They never appreciate in value — except possibly if they turn out to be classics 30 years from now. You always lose money with a car, whether you buy with cash, finance, lease, or rent. Cars are never good investments (except for some old classics). The average new car will lose half its value in three years, and even more in the following years, regardless of what was paid for it.
If a car was originally purchased for $30,000, for example, it’s typically only worth $15,000 after 3 years regardless of whether it was paid for with $30,000 cash, or with a $30,000 auto loan. The owner has lost $15,000 to depreciation, money “thrown away.” If the owner is a lease company, they also lose $15,000 of value, which is exactly the amount they expect the leasing customer to pay — since the customer is the one using and driving the car, and creating the depreciation.
So how are car renting and leasing similar — but different?
Car rental companies have to charge a daily or weekly rate that pays not only for each car’s long-term depreciation in value but also for insurance, maintenance, cleaning, operations, employee salaries, buildings — and a reasonable profit. Since there is no standard formula that customers can use to calculate rental rates, those rates are more or less arbitrary from a customer’s point of view. Money spent on a rental is for the convenience of a short-term use of a car.
In much the same way, it can be said that money spent on leasing is for the convenience of a longer-term use of a car.
However, the cost of leasing is not arbitrary; it’s very predictable and easy to calculate. It’s simply based on the amount that a car will depreciate in value during the time it is driven by the customer during the lease. The amount by which it depreciates is based on the lease term (number of months) and the number of miles driven, and the assumption that the car will be returned at the end of the lease with no excessive mileage or damages (which would further decrease the car’s already depreciated value).
It’s important to note that all new cars depreciate in value whether they are purchased or leased. A car doesn’t know how it was paid for. Therefore money lost in a car lease or purchase is the same either way. If the buyer of a car decides to sell or trade his vehicle after, say, three years, he only gets what remains of the value after depreciation. He “throws away” the money lost to depreciation. The money that is lost is the same amount lost if the car had been leased, not accounting for finance costs that are charged for both loans and leases.
Finance fees are charged for both car purchase loans (interest) and for leases (money factor), and are about the same rates. Of course the actual rate, depends on a customer’s credit score. Credit scores can be accessed online. What’s your FICO score? Find out now when you check your credit report for $1 at Experian.com!
In summary, a buyer pays 100% of the price of a car, either in cash or with a loan. At the end of three years, in our example, he owns a car only worth 50% of the original value. The other 50% is lost. By contrast, a leasing customer only pays 50% of the value of his car and owns nothing at the end of the lease.
Either way, the customer has lost 50% of the original value of the car. The buying customer pays 50% more each month to own 50% value in the end. A leasing customer pays 50% less each month to own nothing in the end.
Since lease finance companies assume their car will be returned at lease-end with no excessive miles or damages, they charge extra if that is not the case — because the car’s value is lessened by those extra miles or damages. But the same applies to cars that have been purchased, not leased. A car with higher-than-average miles and damages is worth less when sold or traded. The point here is that customers always pay for 1) depreciation, 2) miles driven, and 3) damages, regardless of how the car was acquired — whether rented, purchased, or leased.