photo: Pat Durkin
If you’re at all cautious with how you manage your money, getting yourself a new car every year will sound downright crazy. The bottom line — the cost, the rapid depreciation – makes this a pretty silly decision… to put it mildly.
Yet, according to LeaseTrader.com, an online car leasing marketplace that matches car shoppers with those looking to escape their auto lease, a segment of the driving population does just that.
LeaseTrader’s Loyalty Program members — customers who have transferred or taken over a minimum of four vehicles — take over car leases with an average 13.6 months left on the lease. Which, simply put, means that they drive a car for a little over a year before moving on to the next.
Granted, we’re not talking about staggeringly high numbers: John Sternal, vice president at LeaseTrader.com, says its Loyalty Program has roughly 2,500 members, or 4.5% of its marketplace. But there is an interesting trend among these drivers: just three years ago, the average remaining term of taken-over leases was longer, 15.7 months.
“More Loyalty Program members today are getting cars with a shorter amount of time left on the contract,” Sternal says. (Or, from another point of view, more people are eager to get out of their leases, even with as little as a year left on their contract.)
For consumers looking to lease a vehicle, taking over a contract from somebody else rather than signing a new one could be beneficial in a couple of ways. First, they would avoid a down payment: an instant savings of thousands of dollars, depending on the vehicle, according to Sternal. And second, instead of signing a three- or even a five-year contract, they take over a lease with only a year to go. When that year is over, they are free to look for their new set of wheels — and repeat, if desired.
Leasing doesn’t fit with everyone’s financial values and lifestyle, of course. “In a lease, you always have a monthly payment,” says Phil Reed, the Senior Consumer Advice Editor at car information website Edmunds.com. If you like the idea of not having to worry about a car payment somewhere down the road – after three, five or however many years it takes you to pay off a car loan – then buying a car is probably the road you want to take.
That said, what are the financial ramifications of driving off the lot in a new set of wheels every year or so? Here’s some food for thought for those interested in leasing, as well as buying:
Leasing: Are Lease Swaps the Key a Perpetual New-Car Smell?
One of the benefits of leasing is that you get to drive a car without having to worry about depreciation: when the lease is up, you turn in the keys and walk away.
But leasing isn’t without risks. “You have to read the contract and understand it,” says Sternal. Most leases also have a limit on how many miles you can drive: when exceeded, each mile over will cost you extra. Kind of like exceeding your monthly cell phone minutes.
This is one of the most important issues to review if you’re planning to take over a lease, as well: if the original driver has already exceeded the mileage limit (or close to it), you will be the one to pay up for the overage.
And you have to maintain the car meticulously. “You have to understand that, first and foremost, you don’t own the car,” Sternal says. “The bank owns the car. You are just making payments.”
Buying: With the hit on car value, forget it
If you buy (or finance) a car, on the other hand, you’re probably fully aware that new cars depreciate – or lose their value — fastest in the first three years of ownership. In fact, they lose 20% of their value the minute you drive off the dealership, says S.E. Day, a former auto-dealership owner who is now a consumer advocate and the host of a talk format radio show The Legally Steal Show.
Assuming you purchased the car with a loan, it would take an average of 3.5 years before you actually own any equity in your car: before that, it will be worth less than you owe the bank. So by trading it in for a new one after just 13 months, you will have to add that negative equity to the new car’s purchase price.
Repeat this for several years (if you can even find someone willing to finance an ever-increasing amount) and you’ll only find yourself deeper and deeper in debt.
In fact, Day says, you will be so far “upside down” on your loan after only the second trade, that the finance company will require a major down payment before allowing you to buy yet another new vehicle.
To state the obvious: If you’re the type of person who prefers to own cars rather than lease, driving your car until its wheels fall off would be the most prudent financial decision in most circumstances. “Sticking to one’s car is the most inexpensive way to proceed,” Reed says.