After a several-year slump, automakers are getting back into the lease game in a big way. And there are some sweet deals to be had, such as zero-percent financing and up to $750 cash back in some cases.
However, good bargains don't mean you should run out and lease a new car, truck or SUV. Leasing isn't for everyone.
The same factors that determined whether leasing made good financial sense before the Great Recession still hold true today: It is only a good option for those who don't drive more than 15,000 miles annually and who want a new vehicle every few years. Other drivers are usually better off buying.
"Leasing can be expensive and it carries unknown risks," says Jeff Bartlett, deputy online autos editor at ConsumerReports.com.
Lessees basically pay for how much companies think the car will depreciate, not for actually how much they do depreciate; and a car depreciates the most during its first several years, which is the length of a typical lease. There are penalties for driving more miles than allotted and for excessive wear and tear.
Bing: Car-Lease Deals
But in these times of economic uncertainty, some buyers who normally wouldn't lease may find that committing to a 36-month term could be more advantageous than taking out a five- or seven-year loan.
"A lot of people are in a very transitional mode," Bartlett says. "Some people are relocating for jobs, relocating because they lost jobs. There are changing needs that are very dynamic."
So while experts agree that leasing can be more expensive in the long run than purchasing a vehicle — leases force you to always have a car payment ready and to perpetually pay for depreciation — the shorter time span of a lease contract could be a boon for those unsure of what the future holds more than three years out.
For example, someone who loses a job or moves in a year or two will have less of a financial burden with a 36-month lease. Even if that means struggling to meet payments for a while, it might still be better than worrying about selling a car, which may not be worth the principal remaining on the loan.
Considering that scenario, and because there are lease deals to be had at the moment, those who previously would not have considered a lease might do well to look into the option. Again, leasing isn't for everyone, but you won't know until you check it out. To help put things into perspective, here is an overview of recent trends in leasing and the impact they could have on you.
The Perfect Storm
Two key factors have combined to create an environment rife with good lease deals right now: a shortage of good used cars and low interest rates, says Jesse Toprak, vice president of industry trends at TrueCar.com, a new-car pricing guide based in Santa Monica, Calif. "Just three years ago we would've seen interest rates, even for the subsidized programs, to be at least 5 percent or more. And now there are many lease specials that have interest rates that are the equivalent of 1 percent or less."
Banks and other finance companies can offer consumers such low rates because the interest rate the Federal Reserve charges them to borrow money is now at practically zero percent. In other words, banks aren't paying a lot to borrow funds, and are passing those savings on to qualified consumers.
Rates aren't likely to rise much this year, either, Toprak says. "We don't really see economic growth gaining traction, and that's one of the measures that the Fed looks at before deciding to bump up interest rates."
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But interest rates are only half the story. The other key contributor is a vehicle's residual value, which is a prediction of what a new car will be worth at the end of a lease. Lenders use these values to define the down payment, monthly payment, term length and, in some cases, even the interest rate. The higher the residual value, the lower the down payment and monthly payment on the lease.
Residual values are improving for many vehicles partly because used cars are in relatively short supply right now, says Eric Lyman, director of residual value solutions for ALG in Santa Barbara, Calif., which calculates residual values and other analytical data. "In 2009 we saw used car volumes [i.e., the number of used cars available for public consumption] down a little over 4 percent, year over year. In 2010, they were down 6 percent versus the prior year."
This dearth of used cars is driving their values up, which in turn is driving residuals for new cars higher.
The reason used cars are in short supply is largely because automakers tightened production output over the past several years to brace for the economic downturn.
View Slideshow: 2011 Best New Car Resale Values