Let’s talk about cars – specifically car leases
Average life of a car in the 60s – 6 to 8 years
Average life of a car manufactured today – 15 to 20 years
So what happened – technology and innovation! Just as in the case of human beings, this century has seen an exponential increase in the life of vehicles. Thanks to the convergence of various technologies like computers, precision engineering and biomechanics. Also, regulatory requirements on upkeep of cars like the California Smog Check program mandated and managed by the Bureau of Automotive Repair. Someone who buys a new car today; can very well expect the car to run trouble-free in the 2030s. So why is the standard for car leases 3 to 5 years?
Welcome to how a car dealership makes money. Dealerships do NOT make money on the spread between their purchase price, and the selling price. Times are very competitive, plus the internet has made price-shopping very easy for a buyer. That means the negotiation power is now in the hands of the buyer, not the dealership. This has led to the dealers re-inventing ways they make money. They make money on repairs, warranty sales and financing – financing being the core of this article.
Financing methods:
This works in one of two ways:
a) Buyer owns the car, and finances the purchase price through a dealer-affiliated company. Typically auto loans run 5 to 10 years (unlike a home mortgage which runs 15 to 30 years, with 30 years being the most common).
b) Buyer NEVER owns the car; in essence the buyer is paying “rent” for the use of the car. The leasing company owns the car.
Let’s look at issue with a car lease in a mathematical way:
Assumption:
· Average life of a car 15 years.
· Let’s say a consumer in their lifetime drives a car for 60 years.
· Average price of a car $30,000.
Cost of ownership
Cars owned in a lifetime = 60 divided by 15 = 4 cars
Cost of ownership = 4 multiplied by $30,000 = $120,000.
Cost of leasing
Cars leased in a lifetime = 60 divided by 4 years per lease = 15 cars
Amount of lease = 60% of total value = 60% of $30,000 = $18,000
Cost of leasing = 15 cars multiplied by $18,000 = $270,000.
The difference of $150,000 (lease vs own) is what an average consumer spends extra. That means, an average consumer spends more than double the amount by leasing, as opposed to owning! No wonder my auto dealer was so keen on giving me “specials” to sway my decision toward a brand new lease J
Granted, leasing affords new cars every four years – but given the life of a car, isn’t that a waste??
Now here’s where it gets really interesting – if you take the mid-point of savings ($75,000) and the mid-point of years (30 years); re-invest the monies at a 8% compounded annual return – you would have an extra ~ $500,000 in retirement!
Coming back to the topic of the article – the biggest wealth destroyer in America – what takes away half a million dollars from your golden years – car leases!
