With record new car sales in 2015, industry analysts are worried about an inflated pre-owned market with more trade-ins and cars coming in off lease. To help move inventory, companies like Toyota and Ally Financial are starting to offer lease programs for lightly used cars.
While leasing was long mostly the purview of new cars—in fact, one of its biggest benefits—more and more automakers and financiers are getting into this pre-owned lease game. Here’s Automotive News:
Ally launched Ally Pre-Owned SmartLease after a pilot earlier this year. Now the product is available to Ally’s more than 17,500 dealership partners nationwide.
The lease program will “tap into that [used-vehicle leasing] marketplace” and “the needs we think are emerging and growing,” Tim Russi, Ally’s president of auto finance, toldAutomotive News last week at the American Financial Services Association Vehicle Finance Conference in Las Vegas.
[...] The captive finance arms for the Porsche, BMW and Toyota and Scion brands also have started used-vehicle leasing programs recently. Porsche plans to reimburse dealers for loaner vehicle expenses for both nonwarranty and warranty repairs to encourage dealers to add to their loaner fleets, executives said after the brand’s make meeting last week at the National Automobile Dealers Association convention in Las Vegas.
Car buyers have asked me about pre-owned leasing, and for a while the options were limited. Most dealers either didn’t want to be bothered with it or offered lease programs that didn’t offer significant savings over a new car lease.
Of course, if you are the type that thinks leasing is the dumbest financial move you can make, the thought of leasing a pre-owned car sounds even more ridiculous. A lot of people simplify leasing as really just “renting” a new car for a set period of time. However, since the bulk of your lease payments are comprised of the depreciation that impacts a new vehicle within the first few years, leasing a pre-owned car may offer some serious savings.
Used cars have already taken the hardest depreciation hit, and therefore the residual value gap over the course of the lease will be much narrower than a new vehicle. The downside, of course, is that interest rates which translate to money factors on a lease are usually much better on new cars, so a used vehicle interest rate on a lease may pump the payment up a little.
One of the biggest concerns with leasing a used car is making payments on a car that you won’t own and will incur out-of-warranty repairs. This is why it is crucial for buyers considering a pre-owned lease to either choose a car with a solid track record of reliability and/or something with the balance of a factory-backed Certified Pre-Owned warranty.
Lexus has been offering lease programs for its L/Certified vehicles for a while, and the brand has one of the most comprehensive CPO programs in the industry. Lexus will cover you for six years or unlimited miles (yes, unlimited miles) from the original service date. And in terms of reliability, it’s hard to do much better than a Lexus.
Let’s say you were looking for a nice luxury crossover like the super-popular Lexus RX350. You could get something like this CPO 2014 RX350 loaded with premium package, navigation, blind-spot detection and all kinds of extras. It has an asking price of just under $36,000 and an original MSRP that pushed $50,000. Because the original in-service date on this car was October 2013, you would be covered until October of 2019.
Now here is where it gets really interesting. The advertised lease special on a 2016 RX goes for $419 a month for 36 months/10k miles with $4000 down (before taxes and fees) for a $46,000 car. The vast majority of that is paying down the depreciation. Based on the average trade-in values of a 2011 RX, a 2014 RX would only depreciate about $6,000 or so. This means that a lease payment on that ‘14 model would be vastly cheaper than a new lease.
For buyers in the market for a pre-owned car who want to keep their monthly payments down and don’t plan on owning long term, pre-owned leasing could be a nice alternative if they shop smart.