Transportation is one of the largest expenses for most seniors, as I pointed out in our May 2016 issue. Major changes are underway in the U.S. auto market. Consumers who know about them and adopt the right strategies will reduce their transportation costs. Others will be caught in the sea change and increase the percentage of monthly expenses taken by transportation.
After the financial crisis, the percentage of new autos that were leased steadily increased. Leases offer more affordable monthly payments, because you’re not paying for the value the vehicle will have at the end of the lease, known as the residual value. You’re effectively paying for only a portion of the car’s value. Also, auto manufacturers offer attractive deals because they can pass through to consumers the benefits of the Fed’s zero interest rate policy. Zero interest rates also allow the manufacturers to increase the sticker prices of new vehicles without triggering higher payments, as long as consumers qualify for either their low interest loan deals or special lease deals.
The percentage of new cars leased rose to around 30% today compared to 19% in 2008. Those are the overall numbers. Among expensive vehicles, especially luxury cars, around 50% of new cars were leased in recent years, according to Automotive News.
Now, another wave of change is underway. Those leases from a few years ago are ending, and most of the cars will be on the used car market. In 2012, only 1.5 million cars came off lease. In 2015, the number rose to over 3 million, and it is expected to remain well over 3 million for several years. The previous peak was 3.4 million in 2002.
Because of the large supply of cars coming off leases, prices for used cars are declining and will continue to decline. That can create problems for new car shoppers. First, they’ll receive less money than they would have a few years ago for trade-ins. Also, those who choose to lease new cars are likely to have higher monthly payments than in the past, because the estimated residual values of their cars will be lower.
The situation also presents an opportunity. With lower prices for used cars, you’re likely to benefit from buying a used car that just came off lease. The car likely will be around three years old. It also will have reasonable mileage, because under most leases higher payments are triggered if a car is driven more than an average of 10,000 or 12,000 annually.
The quality of most car brands has improved over the years, especially luxury car brands. Many people who lease these cars tend to take good care of them. By looking at off-lease luxury vehicles, you’re likely to find well-made vehicles with low mileage selling at attractive prices.
If you normally buy a new mid-range car, take a look at used luxury vehicles. You might find a quality, low-mileage, luxury vehicle in very good condition that costs the same or less than a new mid-range car.
You can choose between a standard used car and a manufacturer’s certified used car. When a car goes through the certified used car program it is refurbished and inspected. It costs more than a standard used car but comes with a longer warranty and the knowledge the additional work was done.
The auto manufacturers saw this wave of off-lease vehicles coming several years ago and have tried to prepare for it. They’re not going to give the cars away, because they need a base for used car prices to justify reasonable lease rates on new cars. But prices are going to be lower than a few years ago and could be bargains compared to new cars.