West Hartford resident John Lyons is an avid car enthusiast and collector. He has been a consultant in the automotive industry for nearly two decades and closely follows the industry and trends. He has written for Car Collector, Sports Car Market, Old Cars Weekly and writes auction catalog descriptions for cars worth up to seven figures which have been published by many auction houses. His consultancy works with estates to help sell cars that families no longer need.
By John Lyons
In my last column, I talked about the challenges of buying a car in this environment and promised to talk about leasing in my next column. Due to the war in Ukraine and its impact on gas prices, I will also talk about steps you can take to help minimize the impact of the increased cost on your budget.
Many people opt for leasing when looking for a new car. Lower payments can allow many of them to acquire a nicer or bigger car, with more comfort, because the cost of the car is limited to depreciation during the period that you have it, generally about three years.
First, understand that the typical car buyer is VERY sensitive to monthly payments. They have a family budget and a monthly bill of $300 to $500 is a big part of that. Therefore, renting might also be the only option to meet this budget.
For example, you could buy a new VW Jetta for around $23,000, which would result in monthly payments of between $400 and $500 for the car, or you could lease a Passat (which is a larger, more luxurious model) for three years with little money. paid up front and a much lower monthly payment.
At the time of rental, the contract you sign will have an amount (called the ‘residual value’) that their appraisers think the car will be worth when handed over – usually around 62% of the original sticker price after three years. There is some risk as some cars depreciate faster than others.
In the Jetta example, the car cost $23,000 new and had a residual value of just over $14,000 in three years. So for someone with a limited car budget, they can lease and then finance at the end of the lease term and get much more manageable payments. It can be a great bridge for low-income people who obviously need a car as much as anyone.
What’s happened now is that there are shortages of vital auto parts – especially microprocessors that perform virtually every function in cars built today. As a result, there is a global car shortage and rental cars are coming to the end of their term, their real value being MUCH higher than the residual values predicted three years ago.
I know someone who owns a Mini Cooper that is worth nearly $12,000 more than the residual value listed on his contract. This means they can effectively buy the car for $12,000 below retail price (excluding taxes and fees).
Having positive equity in an automobile is really important. Rather than owing the bank more than the car is worth – effectively forcing you to keep the car even if it was destroyed at some point – owing much less than it’s worth is still optimal.
Back to the rental scenario: if you have a rental car that is ending soon and is in good condition with average or low mileage, strongly consider keeping it. If you want a new car, do your homework and make sure the dealership takes into account the increased value when handing it over.
A friend recently had a Subaru lease expire. Subaru wouldn’t negotiate, so he went to Honda and actually got a year of car payments applied to his new lease on a Honda just for giving that dealership his old Subaru. Dealerships are in dire need of inventory.
There are many excellent websites that offer free car values. NADA and KBB are good examples.
Some automakers have begun to restrict through contract who the car can go to at the end of the lease, limiting options to either the customer buying the vehicle or returning it to the original dealership. It’s bad for you as the customer and good for the car dealer/manufacturer.
Having an audience of potential buyers is never better than having multiple potential buyers at the end of the lease. When renting a car, ALWAYS ask if you can trade in your car anywhere or sell it to anyone. If the answer is no, look at other alternatives.
If that friend with the Subaru couldn’t make it to the Honda dealership, he would have lost the recovery of nearly a year of payments on his trade-in. Over $4,000!
So, to recap: if your lease is coming to an end soon, try to buy the car. This will be the best deal out there considering this market. If you want a new car, try to take advantage of the best deal using your old car. Shop around as much as you have to and don’t wait days before you have to return the rental car.
Let’s talk about gas prices and how to combat this inflationary tendency: there are proven rules for doing so. The first is to ditch the SUV.
SUVs (and pickup trucks) traditionally get the worst gas mileage of any car class. If you need something bigger because you have young children, buy a van.
If you’re buying used, do your homework and research the mileage ratings of the car you’re considering when it was built.
Using the example above, VW Jettas built from 2015 to 2018 achieve gas mileage of nearly 43 MPG on the highway. Newer ones still get a little more miles per gallon.
Another way to save money is to buy a car that doesn’t require higher octane fuel. Many cars today require 89 or 91 octane gas. This can be up to a dollar per gallon more than regular 87 unleaded.
Think electric or plug-in hybrid.
A plug-in hybrid allows you to charge the car overnight and then drive around town (maybe 20 miles or so) all electric.
Pro Tip: Some Tesla Model S built between 2012 and 2016 or so came from the factory with free lifetime boost. That means you charge it in any Tesla supercharger for free. Search online for a good used Tesla of this vintage and confirm with Tesla before buying that this particular car is activated with it.
Anything that can reduce your dependence on gasoline is good for you in the long run. Sure, gas prices will eventually get cheap again, but the cost is too volatile and too exposed to geopolitical issues that we have nothing to do with.
Protect yourself by staying away from cars that will force you to spend more and use more gas.
Next month I’m taking a new car for a spin and will give you my review here. Plus, I’ll talk about the risks of being a monthly payment-focused buyer and how you should focus on everything BUT the monthly payment when buying a car.
Until then, I’ll see you on the road!
West Hartford resident John Lyons will write a monthly car column and talk about the industry. It will also provide tips for car buyers to help readers get the best deal.
A version of this column appeared in the April issue of West Hartford LIFE.
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