why is everyone saying "lease because of depreciation"

[flapjake314]

i'll start by saying i have extensive experience in corporate finance but have never leased a car nor looked into it with a lot of detail

i see a lot of people say to lease new EV's (and the Mach E specifically) because of the steep depreciation (no need to discuss the $7500 tax credit, the stated reason is depreciation).

this makes no sense to me. depreciation is factored into the lease, and the fact that it is steep means consumers are paying for the steepest part of it when they lease. a lease can be created synthetically by buying the car, pre-agreeing today on the future 36th month resale price, and financing the transaction for 36 months. why would steep depreciation = better to lease? you'd almost think the opposite...

the only reason leasing would be better is if the actual depreciation is even steeper than the calculated depreciation today. when i did the math 3 years ago, the lease was implying ~70% of the value would be depreciated so i decided to just buy.

in my opinion, leasing is just a pre-bundled finance + trade-in package. if you are planning to do both anyway, take a look at leasing. if you weren't going to trade in your car every 3 years nor get financing, unless you have some kind of crystal ball about car values, i cannot understand why the steepness of depreciation would make you want to lease.

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[phil]

You're right. A lot of people think they are smarter than leasing companies. They think they understand the depreciation of electric cars better than the finance experts who design and manage car leases. You will not convince them otherwise.

 

[AtomicInternet]

I present the pandemic:
I leased a 2017 Focus ST and planned to return it. Cars were suddenly scarce in 2020, so I bought out the lease at the predetermined price and flipped it to Carvana for an $8k profit.
The level of appreciation was not forseen

I present a new vehicle platform with unknown residual value calculations (Mach E):
If I had purchased my current vehicle I'd be upside down in my loan. I'm happy I leased (with no money down) so I can return it and not be saddled with debt.
The level of deprecation was not forseen

The deprecation of electric vehicles has historically (last 3 years) proven to be very steep, hence all the recommendations to lease. Alternatively, used EV prices are bottomed out so that makes even more sense financially since the majority of software updates make it to the older (pre-2025) models as well.

Personally I recommend leasing if it's your first electric vehicle so you can see if you want to commit long term (most do). I'm also a technophile so since I buy a new phone every 2 years leasing is the cheapest way for me to satisfy my technolust of latest and greatest.

 

[Sikkun]

I believe for majority of them it’s because they don’t view a vehicle as something they will keep for more than 3 years so “upside down” on a loan matters.

On the other hand if you’re driving the thing 100k+, keeping it for 10 years, etc. The depreciation will not be relevant.

 

[flapjake314]

The deprecation of electric vehicles has historically (last 3 years) proven to be very steep, hence all the recommendations to lease.

i'm glad i found someone who believe this, but i don't think you have explained why leasing leads to better outcomes when the depreciation is steep? or if you did i'm not still not understanding it

again my position is the steep depreciation is already priced into your lease. you complained about being upside-down on your car loan, but that is because your car loan payment is lower than your lease payment. if you paid exactly the same monthly payment between loan and lease, you would be at exactly the same position (assuming the leasing vs bank is giving the same interest, ignoring the $7500 credit, etc).

 

[DaddyDeuce]

why would steep depreciation = better to lease? you'd almost think the opposite...

The depreciation rate in isolation doesn't matter. What matters is how accurately the residual predicts the actual depreciation.

Risk-Assignment:

Your lease will have an agreed upon residual value. This is known up front. Lets say for example that it is 60% of MSRP on a $70k car, for a $42k residual value.

Then there will be the actual depreciation. This can be estimated but not exactly known up front. As long as the actual depreciation is close to the residual calculation then everything goes as planned. But what if for some reason the car depreciates slower or faster than the finance company assumes?

If the deprecation is faster than planned and the car is only worth $32k at the end of the lease then you got to depreciate the car by $38k when only $28k of depreciation was planned. The finance company loses.

If the deprecation is slower than planned and the car is worth $47k at the end of lease then you have lease equity. Buy out the car for $42k and sell it for $47k. The finance company loses.

The finance companies may be pros at this but they don't always get it right. Sometimes captive finance will do something like raise residuals for one month (and take a loss) in order to help the manufacturing side move more cars.

 

[flapjake314]

The depreciation rate in isolation doesn't matter.

this is all i came here to discuss really, does the steepness matter. why is a mach e better to lease than a honda civic. i think your opening statement is it's not.

but let's also discuss the risk assignment point since you raise it. how likely is the dealer going to be wrong (and in what direction) if the lease is already implying 70% depreciation in 3 years? compared to a honda civic where they imply [20%] (i'm making up the number i didn't check)? because i would actually suggest dealers are likely to over-estimate the depreciation (thereby charging you more on the lease) for the mach e than the civic

 

[RyZt]

This doesn’t apply to Mach E. But for many EVs (especially Hyundai, Kia, Mercedes), the manufacturer assigns stupidly high residual value. I believe it’s their way of discounting the vehicle without lowering MSRP (or offering cash incentives).

steep depreciation + high residual value = better to lease

 

[DaddyDeuce]

how likely is the dealer going to be wrong (and in what direction)

I don't know how often but here's a real world example.

In 2022 you could have done a 24-mo lease on a $165k Audi RS e-tron GT with a 67% residual (implied depreciation of 33%). Your payments would have been $2,847/mo for a 2-year cost of $68,338. After two years you have the choice of buying for $110,529 or walking away.

Two-year cost = $68,338

Now say financed the car on a 24-month loan (not realistic but keeps the comparison simple). Your payments would be $7,237/mo for a 2-year cost of $173,699. After two years go to sell the car and find trade-in value is $52,500.

Two-year cost = $121,199 ($173,699 - $52,500)

The difference is because Audi assumed 33% deprecation while actual depreciation has been closer to 70%.

 

[TheSteelRider]

i'll start by saying i have extensive experience in corporate finance but have never leased a car nor looked into it with a lot of detail

i see a lot of people say to lease new EV's (and the Mach E specifically) because of the steep depreciation (no need to discuss the $7500 tax credit, the stated reason is depreciation).

this makes no sense to me. depreciation is factored into the lease, and the fact that it is steep means consumers are paying for the steepest part of it when they lease. a lease can be created synthetically by buying the car, pre-agreeing today on the future 36th month resale price, and financing the transaction for 36 months. why would steep depreciation = better to lease? you'd almost think the opposite...

the only reason leasing would be better is if the actual depreciation is even steeper than the calculated depreciation today. when i did the math 3 years ago, the lease was implying ~70% of the value would be depreciated so i decided to just buy.

in my opinion, leasing is just a pre-bundled finance + trade-in package. if you are planning to do both anyway, take a look at leasing. if you weren't going to trade in your car every 3 years nor get financing, unless you have some kind of crystal ball about car values, i cannot understand why the steepness of depreciation would make you want to lease.

The house always wins.

You will see people responding with anecdotes about how a lease cost or would have cost them less money and how they "won". Remember those are anecdotes and you should evaluate those on a case-by-case basis and understand the extra-ordinary, unusual, and unexpected situation that led to it. Also, this is the internet, so weight any anecdote with the appropriate grain of salt.

Some other responders have really hit the nail on the head -- you are gambling against 6-figure accountants working full time whose sole job it is is to extract the most amount of money out of customers. Think about it -- really think about it. Do billion-dollar automotive companies really and truly price their leases such that the customer will come out ahead and they will come out behind?

The house always wins.

 

[DaddyDeuce]

The house always wins.

The house doesn't always win.

Two recent times the house got it wrong:

They did not predict the pandemic car shortage, that it would lower depreciation on used cars, and that some people would be happy to end up with lease equity.

They did not predict the steep depreciation on all the new EVs introduced in the 2019-2022 time frame. Many of those lease ended with the cars depreciated far under residual.

This isn't the controlled environment of a casino where everything is statistics. It has a market element to it, and like any market it is difficult to accurately and consistently predict outcomes.

I'll agree they are right much of the time, but I'm betting GM was wrong when they leased me a 2025 Equinox EV for 24-months with a 79% residual. That car is going to depreciate a lot more than 21% in that time.

 

[Ravensfan1996]

Some people like getting a car every 2-3 years so the lease makes sense for them. If you like having a car payment forever that works for them. You are also getting a new car under warranty and returning before the warranty expires. On Luxury cars that are expensive to repair, i see why people do that. I keep cars for a long time before i buy a new car, so deprecation never really hits me as after 5-6 years i have no more payments. I never buy ext warranties but did with the Mach E. I order my ‘21 Premium AWD ER and got it in July 2021. I’ll probably keep it 7-8 years and see what else is out there.

 

[TheSteelRider]

The house does not always win.

Two recent times the house got it wrong:

They did not predict the pandemic car shortage, that it would lower depreciation on used cars, and that some people would be happy to end up with lease equity.

They did not predict the steep depreciation on all the new EVs introduced in the 2019-2022 time frame. Many of those lease ended with the cars depreciated far under residual.

This isn't the controlled environment of a casino where everything is statistics. It has a market element to it, and like any market it is difficult to accurately and consistently predict outcomes.

I'll agree they are right much of the time, but I'm betting GM was wrong when they leased me a 2025 Equinox EV for 24-months with a 79% residual. That car is going to depreciate a lot more than 21% in that time.

... case-by-case basis and understand the extra-ordinary, unusual, and unexpected situation that led to it...

Thanks for proving the point.

 

[flapjake314]

just to try and refocus the conversation a bit, i don't want to discuss broadly lease vs buy. that's a discussion as old as time and we can all google the pros and cons.

i'm trying to discuss why it's better to lease a vehicle with a steeper depreciation compared to a more stable value.

if someone thinks they've presented an argument on that maybe reiterate it because i'm still having trouble seeing why most of the comments thus far don't apply generally rather than only/more when the depreciation is steep

 

[TheSteelRider]

just to try and refocus the conversation a bit, i don't want to discuss broadly lease vs buy. that's a discussion as old as time and we can all google the pros and cons.

i'm trying to discuss why it's better to lease a vehicle with a steeper depreciation compared to a more stable value.

if someone thinks they've presented an argument on that maybe reiterate it because i'm still having trouble seeing why most of the comments thus far don't apply generally rather than only/more when the depreciation is steep

It's not when the depreciation is steep. It is when the depreciation is unexpectedly steep, or said differently it is when the consumer bets that the depreciation will be more than what the automaker predicts it will be.

When you lease a car, the predicted depreciation, as you have pointed out, is "priced in". But, what if at the end of the lease, the actual depreciation turns out to be more ("steep" as this thread is saying) or less (do we call that "shallow"?). In the case the depreciation is more, the consumer wins. In the case the depreciation is less, the automaker wins.

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