The Secret Behind Car Subscriptions
Car subscription works by offering vehicles that have passed that initial fast depreciation stage, allowing consumers to pay a lower monthly payment on a car with no commitment. The big mental shift for those interested in ‘subscribing to’ their next vehicle is that you likely won’t be driving freshly minted new cars.
We’ve talked about the changing winds in car ownership and the landscape of car subscription offerings in our last two posts. Hopefully by now, you’re wondering if this whole car subscription thing is a good way to use a car and how it compares to a traditional finance or lease (and if you’re not, you might just be the no-hassle customer that car subscription companies are looking to attract).
Well, we’ve rolled up our sleeves, dusted off the old calculator and crunched some numbers.
In order to make the comparison, we’ll first take a look at the costs of a traditional finance and lease. For the sake of comparison, we will use the Hyundai Elantra GLS, a popular compact 4-door sedan. All amounts are in Canadian dollars.
2018 Hyundai Elantra GLS
MSRP: $23,999.00
Delivery: $1,705.00
Fees: $127.50
Current Finance Offer: 0% for 72 months*
Current Lease Offer: 0% for 36 months and $400.00 discount*
*as of April 9th, 2018 in Ontario
* Data from Edmund’s True Cost of Ownership. Service & maintenance costs are averaged across monthly payment.
Finance vs Lease
If you were to finance the Elantra GLS at 72 months, your monthly after-tax payment would be about $405. This includes basic powertrain warranty (engine, transmission, drivetrain) for 100,000 km or 5 years, whichever comes first. If you add on their upgraded warranty package to cover most repairs, that $405 becomes $445 for 6 years or 120,000 km. Note that this does not include regular maintenance such as oil change, tires, brakes. With maintenance and services, your average monthly cost would be around $488.
Compare that to a 36-month lease (with the discount) and you’re looking at around $402 per month, and that is very close to the 72-month finance monthly price. Hyundai seems to be aware that consumers care more about the monthly payment than the overall costs since the discount on leasing they offer brings the lease payment down to almost exactly match the financing payment. Add in that warranty and maintenance though, and your payment goes up to $526. The increase is higher on the lease payment because you are paying that warranty package off in 36 months instead of 72 (even though you may not get to enjoy the full 6-year coverage).
Finance vs. Subscription
So how does a subscription program compare? Well, our analysis and calculations show that you would be able to subscribe to the Elantra GLS for as low as $424 per month. This would include the upgraded warranty package as well as regular maintenance such as oil changes, tires and brakes. You would also have the option to cancel your subscription at any time, which is great if you are afraid of commitment or have FOMO on another car.
Pricing is Complex
The $424 per month price is for an older model Elantra GLS, a 2015 to be exact. If you opt for newer model years, that subscription fee will go up. The reason this happens is because when paying for a lease or a car subscription, you are actually paying for the drop in value of the car during the length of time you are using it.
That drop in value is called depreciation.
You may have heard that a new car instantly drops in value when it is driven off the dealer’s lot. What you may not know is that depreciation tends to be much faster in the first 1–2 years of a new car, and slows down in subsequent years.
Car subscription works by offering vehicles that have passed that initial fast depreciation stage, allowing consumers to pay a lower monthly payment on a car with no commitment. The big mental shift for those interested in ‘subscribing to’ their next vehicle is that you likely won’t be driving freshly minted new cars.
The other finer point on depreciation is that there are actually two values that matter: Retail value and Residual value. In our next blog in the series, we’ll actually break down in detail how the subscription price is calculated and how the Retail and Residual values play into this.
Finally, it’s worth pointing out that different vehicles have different depreciation speeds that affect the monthly price on a subscription vehicle. Let’s take a look at the Hyundai Sonata:
2018 Hyundai Sonata GLS
MSRP: $28,649.00
Delivery: $1,805.00
Fees: $127.50
Current Finance Offer: 0% for 72 months*
Current Lease Offer: 0% for 36 months*
* as of April 9th, 2018 in Ontario
The 72-month finance works out to $479 per month ($523 with upgraded warranty). Leasing for 36 months would be $608 ($697 with warranty). Car subscription would be around $371 per month (for a 2017 model). The reason the Sonata GLS ends up being such a good deal for subscription has to do with how the car depreciates in the first year and subsequent years thereafter.
In its first year as a new vehicle, the Sonata’s retail value drops a whopping 34% vs the Elantra’s 25%. However, the Sonata’s depreciation in later years (year 2 is only 2%) is much slower, meaning that if you bought the Sonata new and used it for only 1 year, you’d be getting a bad deal, but if you bought the Sonata after someone else had owned it for 1 year, you’d be getting a very good deal (assuming you negotiated the price at market value).
With all the variety of car ownership models available to consumers today, it’s important to recognize that your personal preferences and life stage will dictate the best ownership model for you. Car subscription offers another option to fit your lifestyle, and outside of the convenience and flexibility aspects, it can also be a very cost-effective way to use a car for medium to long term.
