Quite often, what makes a deal appealing for a consumer is not price so much as fit. If your sizable family
needs to replace its minivan, for instance, a bargain on a sports car doesn't do you much good. If you're shopping
for a luxury sedan, a sale on full-size pickups won't help you.
In the same way, the question of whether to buy or lease a car can hinge more on how you'll use the vehicle
than on what the monthly cost will be.
That's not to say the money doesn't matter. With the average price for a new car approaching $25,000, fewer
people can afford to pay cash for a new set of wheels. That makes financing—either through an
auto loan or a lease—more likely. And lately, about a third of all
new cars are acquired through leases.
In a lease, you pay to use a car for a certain period. Essentially, you cover the difference between the
"capitalized cost" of what the vehicle sells for now and the "residual value" of what the car is expected to be
worth at the end of the lease. Plus, you pay a rent charge.
Leasing typically lets you drive more car for less. On a monthly basis, leasing can be cheaper than buying a
new car. For example, a $21,000 Dodge Intrepid could cost you $600 a month for three years, with a $2,000 down
payment and a
three-year loan at 8.5% interest. A three-year lease on the same vehicle, with no money down, would run about
$350 a month.
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Negotiate the price just as you would if you were buying.
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When the leasing craze caught fire in the 1990s, the finance arms of auto makers battled with major lending
corporations for the business. But in the heat of competition, many companies overzealously discounted leases by
inflating the residual value of vehicles. That meant that as the leases ended, the lenders were stuck with
vehicles that weren't worth as much as they had banked on. As a result, they've lost money on the leases—to
the tune of about $11 billion in 2000, according to Bankrate.com, and perhaps another $10 billion in 2001.
The bottom line is that consumers now will be hard-pressed to find leases as low as they've been in recent
years. Monthly payments for new leases could be going up $80 to $100, reports
Bankrate.com, a financial trade monitor based in North Palm Beach, Fla.
With that in mind, consumers should be particularly guarded in their considerations of whether to lease or buy
a car. And, if they decide to lease, they need to be even more vigilant for a deal that fits their situation.
Lease or buy?
The best candidates for leasing are motorists who, every three years or so, want to
drive a new car that's more expensive than what they can afford to buy. Leasing generally suits those who drive
less than the annual limit of 12,000 miles to 15,000 miles that's in most lease agreements. It also fits drivers
who take care of their vehicles and who use their cars for business, in which case they might qualify for tax
deductions.
If you want to own your car and drive it as long and as far as you please and not be restricted in what you do
with it and be able to sell it or trade it later, then leasing isn't up your alley.
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Notice whether you're required to increase your insurance coverage.
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Leasing tips
If you're leaning toward leasing, you also need to be prepared for a somewhat more
involved process than what you may be accustomed to when you buy a car. That means you need to be even more on
your toes. Understand
how the process works,
get comfortable
with the lingo. Then do the comparison shopping, the
dickering, and the fine-print reading. And then get ready to repeat the process when the lease expires.
What to watch out for:
- Car price. Negotiate the price just as you would if you were buying. In fact, don't let on that you're
leasing until you've got the car price you want. Learn what prices to expect through Internet resources such as
www.edmunds.com and
www.autosite.com. Use that
"capitalized cost" as a starting point when comparing lease deals.
- Down payment. More dealers are seeking down payments on leases. That brings down the monthly lease payments,
but it also dilutes a prime advantage of leasing—minimal money down. Keep in mind that down payments are not
refundable should you need to leave the lease early.
- Trade-in. If you're trading in a vehicle, make sure the lease shows where that value has been applied to your
lease. Check out how much your trade-in is worth in advance at sites such as
Kelley Blue Book
and
Autopedia.
- Money factor. This figure usually isn't disclosed, but you can ask to see it. It's comparable to the interest
rate you'd pay on a new car loan. Find out the "money factor," multiply it by 24, and it should be pretty close to
the going interest rates for car loans. If it seems far off, ask about it.
- Wear and tear. Be clear on what's considered "normal" wear and tear on the vehicle and what's "excess," for
which you'll pay extra at the end of the lease. Those terms aren't always defined the same. Ask about it and get
it in writing.
- Warranty. Don't let the lease outlast the vehicle's basic warranty or you may be paying major repair bills on
a car or truck that you don't even own.
- Extra miles. Mileage in excess of the lease agreement typically costs you between about 10 cents and a
quarter per mile. If you anticipate driving farther than 15,000 miles a year, it usually is cheaper to pay up
front to extend the limits. If you anticipate driving less than the limits, ask to lower them for a discount or to
be refunded for unused miles.
- Records. If you don't get copies of all the documents you sign, ask for them. You may need them if
complications occur down the road.
- Insurance. Notice whether you're required to increase your insurance coverage. Also, check whether the lease
includes "gap" coverage that protects you if the vehicle is stolen or wrecked.
- End costs. Take note of all the expenses involved in returning the car, particularly if you decide to leave
the agreement early. For instance, there's usually a "disposition fee" for picking up the vehicle and processing
it so it can be sold to someone else.
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Leasing generally suits those who drive less than the annual limit of 12,000 miles to 15,000 miles.
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Eventually, thanks to the Electronic Signature Act of 2000, it should be easy to arrange a vehicle lease
online. But beware! Under rules being considered by federal regulators, the e-signatures would make consumers more
responsible for reading and understanding the leasing disclosures on their own, rather than having dealers walk
them through the agreements.
And remember to talk to the people at
your credit union about leasing and
loan options. You may find that the credit union has a loan with all the features you're looking for in a
lease.
Published July 2, 2001
Printed Sunday, October 12, 2008
Home & Family FinanceŽ Resource Center
Copyright © 2008 - Credit Union National Association, Inc.
