Op-Ed: Leasing a Car Means Driving Now, Paying Forever
Six reasons why leasing could be the worst financial decision you ever made.
'Cause we all just wanna be big rockstars
And live in hilltop houses driving fifteen cars
Americans love their cars. Americans are their cars. There's a strange belief rampant in the US, a belief that cars are a measure of status and achievement. If you want your neighbors, friends, and perfect strangers to think you're a success, just tool around in a Mercedes SUV.
But this recession is forcing these status-conscious auto-worshippers to forego their beloved cars. The result is that auto sales have plummeted from an annual rate of 16 million to a current rate of less than 10 million. These short-sighted people have allowed the temporary psychological benefits of driving a car they can't afford to outweigh their long-term financial future. Millions have made this choice. Now that the debt bubble has imploded, and the government is pouring billions of taxpayer funds into the auto-financing companies like GMAC (GM) to re-inflate the bubble.
The American consumer has changed their car-buying habits over the decades. In the 1970s, they saved up the 20% down payment, then financed the remaining balance over 3 or 4 years. With an average loan of $4,000 to $8,000, the burden wasn't great. After 4 years, they owned the car, free and clear. They would then drive their American-made car until it fell apart, usually at around 90,000 miles. In 2008, the average new-car loan topped out near $30,000. In comparison, the median home price was $17,000 in 1970.
The $30,000 average car loan was made manageable by the "creative" auto financing arms of the Big 3 (GM, Chrysler, and Ford (F)) extending loan periods to 6 or 7 years. This worked fine for the trader-uppers; they wouldn't be caught dead driving a 7-year-old car. Car buyers told themselves that debt didn't matter; car companies told themselves the loans would be repaid. A perfect combination to sell 16 million cars annually for all eternity.
When the return customer came into the dealership to trade up after 2 years, the dealers were perfectly happy to roll the unpaid loan balance into the new deal. Presto! Millions of people driving cars with a loan-to-value ratio of 140%. According to JD Power, there are now 6 million people who are underwater on their car loans. When this Ponzi scheme collapsed, car sales plummeted 40%, and GM and Chrysler have been revealed as bankrupt.
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