Cars

Low Rates Mean You Can Now Get a Mercedes With a Chevy Income

But should you?

A Mercedes-Benz SLK 250, now a bit more within reach of the average driver.

Photographer: David Paul Morris

This is a tempting time to be a lover of cool cars. Thanks to lease offers, low interest rates, and low gas prices, it’s gotten dangerously easy to drive off the dealer lot with a brand new luxury car.

Buying a used car is almost always a better deal over the long term than buying or leasing a new one. That’s the classic personal finance advice, and it still applies. But in recent years the irresponsible choice has gotten a lot more enticing.

Low interest rates make it possible to afford pricier cars for the same monthly cost. In the past five years, the average vehicle’s cost is up about $5,000, to almost $33,000. Despite this, the monthly payment on that car is up only about $30, an analysis by Bloomberg Intelligence shows. That’s because the interest rate on the average five-year auto loan is now only about 3 percent per year, down more than four points since 2009.

Gas prices have also tumbled. That has little direct impact on car buyers, but it has a psychological one, says Bloomberg Intelligence senior auto analyst Kevin Tynan. When prices are high, consumers tend to be more conservative. Now that they’re low, drivers can feel like using their savings to upgrade their wheels.

Finally, luxury automakers such as BMW and Mercedes are eager to get young buyers to try their cars. They’ve come out with lower-priced models, and they’re offering big incentives for those who lease them. The strategy is working: About 60 percent of U.S. “entry luxury” cars are leased, up from 43 percent five years ago, according to Edmunds.com. That’s more than twice the lease rate for all vehicles. When leasing a luxury car costs about the same per month as buying a used, low-mileage Chevrolet, who can resist?

Leasing a car isn’t necessarily the dumbest move a driver can make. There are practical reasons a lease can make sense. You might need a certain kind of vehicle for only a short amount of time, says Kelley Long, a Chicago-based CPA financial planner who serves on the National CPA Financial Literacy Commission. For example, a family might need a minivan for only a few years before the children grow up.

Also, a lease may make sense for people who temporarily need to hoard cash or avoid taking on debt, says financial adviser Matt Haghighi of Amity Capital. Consider people who are about to buy a home: Leasing might let them save more for a home downpayment, while also reducing their debt load and making them eligible for a lower mortgage rate. 

Then there are those who just love driving a new, expensive car. “If driving a luxury car is important to you, this is an excellent opportunity,” Long says. Her warning: Just because you can afford a luxury car, don’t let yourself upgrade other aspects of your lifestyle above your budget. And realize that it can be hard to go back to a lower-quality car when the lease is up. You may need to do so, though. In a few years, leases and auto loans may be far more expensive.

Price-conscious car lovers might consider another strategy. With so many luxury cars being leased these days, there may be a glut of expiring leases in a few years. So if you can wait until 2017 or so, Tynan says, you can expect to find many more low-mileage, attractively priced luxury cars out on used-car lots.

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