The End of Car Ownership?

Micro leases? Vehicle subscriptions? Are they taking over vehicle ownership? According to Boston Consulting Group subscriptions are on the rise.

Subscriptions are easy; just pop open the app and secure your ride for a week or a month at a time. Sell your car, get out of your lease, feel the freedom!  Forget about maintenance and insurance, just pay for your subscription plus gas.

Sounds great, right? But will it replace car ownership? 

Why not? It’s so much easier, and you won’t get locked into one of those pesky 72-month car loans or 36-month leases, right? I mean who knows what car you’ll want (or need) to drive in 12 months much less 36 or 72 months…

Maybe. Let’s break it down.  (Trigger warning, here comes come math.) 

For a RAV4 LE, the purchase costs $678 per month total with a $31,613 purchase price, $10,000 cash down, $353 per month for a 72-month loan at the current market average of 6.44% APR for good credit (661-780 FICO score), selling price of $16,586 at 36 months which is a 56% residual value, and $179 per month for insurance. (everything but gas and maintenance)

For the same 2023 Toyota RAV4 LE, a lease costs $758 per month total including a 36-month lease payment of $484 per month, $1,134 upfront payments spread across the 36 months, and $179 per month for insurance. 

A RAV4 subscription costs $1,188 per month which includes insurance.

To purchase a RAV4 LE would be $510 per month cheaper than its subscription cost. That's almost double!

A more recent type of offering, @AutomotiveNews recently reported that @AutoNation introduced 6- and 12-month micro leases. For example, a 12-month micro lease costs $1,199 per month for a 2023 Dodge Challenger including the $2,400 upfront cost, plus separately purchased insurance for $179 per month.

The subscription and the micro lease are more expensive than the lease and the lowest cost of all is the purchase. But why?

The answer is contained in this one word: Flexibility.

When you choose to have the flexibility to turn-in your subscription vehicle after only a week or a month, you pay for that luxury. Flexibility is a luxury. Choice is a luxury.

When you turn that vehicle into the subscription company it must be cleaned, and maybe repaired, and then it sits and waits for its next subscriber.  While the car waits it depreciates by roughly $400 per month on average according to Polly’s partner Progressive.  And those costs are not just soaked up by the subscription company, they pass those costs on to you.  You pay a premium while you are subscribing, and they use this money to cover their costs when cars sit unused between subscribers.  It’s kind of like a luxury tax you pay for the option to choose when you want to subscribe and when you don’t.

If you turn the coin over from the luxury of choice, on the back you’ll see the value of commitment. Commitment has real financial value. The same way that married filing jointly gets a tax break, and the 18-year commitment that is raising a child gets a tax break. Our financial system gives those of us who make a commitment a better deal, like when you commit to paying a loan 72 months.

Back to micro leases. How much will they cost per month?  It’s easy to predict what the cost should be - less than a subscription and more than a lease. Because they offer much of the flexibility of a subscription without the cost of the insurance.

Adopters

So, will subscriptions and micro leases revolutionize the automotive retail market and take over the notion of car ownership?

Nope. They won’t.

Most of us will keep buying and leasing cars, trying to get the best deal for commitment we are willing to make. For those of us who need the flexibility or can afford the luxury of choice will gravitate to micro leases and subscriptions.

Who will these people be?

The first set of adopters of these alternatives to car ownership will be those who don’t have the financial predictability, and who don’t have the certainty of a stable career and income to afford a long-term car loan or lease and therefore won’t benefit from the better deal that can be had from that commitment.  It’s a large and growing segment of the population that will continue to stratify the notion of “car ownership”.  They might subscribe for a few months at a time or choose a micro-lease.

And on the opposite end of the spectrum of those who will adopt are those who can afford the luxury of choice, for example swapping a 911 this week for a LR4 next week and an F-150 Raptor the next. But it will remain a small luxury services segment that won’t replace car ownership.

And a third category of people will adopt this model are those who are in short term situations. Think international graduate students, and professors, or careerists transplanted to a new city from a major metro area where they didn’t need a car – think NYC to Dayton, OH for example. This segment will always be small and won’t take over car ownership as we know it.

Conclusion

In the end, people will find the best deal. They will make the level of commitment they can afford to make to get the best deal. They will pay a premium for the luxury of choice.

Cars will be purchased.

Cars will be leased.

Cars will be microleased.

Cars will be subscribed to.

The world is stratifying.