Let’s talk about cars, specifically car leasing
Average life of a car in the 60’s – 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 human beings, this century has seen an exponential increase in the life of vehicles. Thanks to the convergence of various technologies such as computing, precision engineering and biomechanics. Also, regulatory requirements on automobile maintenance, such as the California Smog Check program, mandated and administered by the Bureau of Automobile Repair. Someone who buys a new car today; you 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 difference between the purchase price and the sale price. Times are very competitive, plus the internet has made price searching very easy for a buyer. That means the bargaining power is now in the hands of the buyer, not the dealer. This has led merchants to reinvent ways of making money. They make money from repairs, warranty sales, and financing, with financing being the core of this article.
Financing methods:
This works in one of 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 which lasts 15-30 years, with 30 years being the most common).
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 problem with leasing a car in a mathematical way:
Assumption:
· Average life of a car 15 years.
Let’s say a consumer in his life drives a car for 60 years.
Average price of a car $30,000.
cost of ownership
Cars ever owned = 60 divided by 15 = 4 cars
Cost of ownership = 4 multiplied by $30,000 = $120,000.
lease cost
Lifetime leased cars = 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 difference of $150,000 (leasing versus owning) is what an average consumer spends extra. That means an average consumer spends more than twice as much on leasing, instead of owning it! No wonder my car dealer was so interested in giving me “special offers” to influence my decision toward a new lease J
Granted, leasing offers new cars every four years, but given the lifespan of a car, isn’t that wasteful?
Now here’s where it gets really interesting: if you take the midpoint of savings ($75,000) and the midpoint of years (30 years); reinvest the money with an 8% compounded annual return – you’d have an extra ~$500,000 in retirement!
Back to the topic of the article: America’s Biggest Wealth Destroyer Taking Half a Million Dollars Out of Your Golden Years: Car Rentals!