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! As in the case of humans, this century has seen an exponential increase in the useful life of vehicles. Thanks to the convergence of various technologies such as computing, precision engineering and biomechanics. In addition, regulatory requirements on car maintenance, such as the California Smog Check program, required and administered by the Bureau of Automotive Repair. Someone buying a new car today; We can expect the car to run smoothly in the 2030s. So why is the standard for car leases 3-5 years?

Welcome to how a car dealer makes money. Dealers do NOT make money on the spread between the purchase price and the sale price. Times are very competitive, plus the Internet has made price shopping very easy for the buyer. That means that the bargaining power is now in the hands of the buyer, not the dealer. This has led dealers to reinvent ways to earn money. They make money from repairs, warranty sales, and financing, with financing at the core of this article.

Financing methods:

This works in two ways:

a) The buyer owns the car and finances the purchase price through a company affiliated with the dealer. Auto loans typically last 5-10 years (as opposed to a home mortgage that lasts 15-30 years, the most common being 30 years).

b) The 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 the car leasing problem in a mathematical way:

Assumption:

Average life of a car 15 years.

Let’s say a consumer in your life drives a car for 60 years.

Average price of a car $ 30,000.

Cost of ownership

Lifetime cars = 60 divided by 15 = 4 cars

Cost of Ownership = 4 times $ 30,000 = $ 120,000.

Lease cost

Cars leased for life = 60 divided by 4 years per lease = 15 cars

Lease amount = 60% of total value = 60% of $ 30,000 = $ 18,000

Lease cost = 15 cars multiplied by $ 18,000 = $ 270,000.

The $ 150,000 difference (rent versus ownership) is what an average consumer spends extra. That means an average consumer spends more than double the amount on rent, rather than owning. No wonder my car dealer was so keen on giving me “specials” to influence my decision on a new lease. J

Of course, leasing allows you to get new cars every four years, but given the lifespan of a car, isn’t that a waste?

This is where it gets really interesting: if you take the midpoint of the savings ($ 75,000) and the midpoint of the years (30 years); reinvest the money at a compound annual return of 8%; You’d have an additional ~ $ 500,000 in retirement!

Going back to the topic of the article, America’s biggest destroyer of wealth, taking half a million dollars from its golden years: car leases!