For Drivers With Expensive Taste, Better Lease Than Buy
Luxury cars, and even more modest autos, are often cheaper to lease and offer shorter, more flexible terms
MANY television commercials and newspaper advertisements pitch smart new cars for low monthly payments. But quite likely, the advertisement is for a lease.Skip to next paragraph
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Nearly one in every four new cars is leased, according to the National Automobile Dealers Association (NADA) in McLean, Va.
``There's a change in the [consumer] mind-set,'' says Ted Orme of NADA. In the past, ``the idea of renting without gaining any equity was foreign.''
Leasing has nearly doubled in the past two to three years, Mr. Orme says, as car manufacturers have begun to promote leases rather than rebates and other buyer incentives. In 1992, Americans leased 1.7 million new vehicles, up 20 percent from 1991, NADA reports.
``Profits are down on the sales of new cars,'' he says. ``With leasing, they get another crack at the customer.''
In the past, car leases were mainly for luxury vehicles and for business use. Now, everything from pickup trucks to compact cars can be leased. Many people consider car payments a monthly transportation cost rather than a loan that will eventually be paid off, Orme says, and thereby justify the ongoing expense.
With low manufacturer-subsidized interest rates, leasing a car is becoming a more attractive option for consumers at all income levels. ``Car prices have grown quicker than people's incomes,'' Orme says.
From the manufacturer's point of view, leasing puts more cars on the road than selling alone. Leases generally offer customers more flexible terms than financing a loan for a new car.
But leasing is not always a good deal. ``Excess wear and tear and excessive early termination charges are the two biggest areas of abuse,'' says Randall McCathren, executive vice president at Bank Lease Consultants Inc. in Nashville. Most leases set a 15,000-miles-a-year limit - extra mileage costs 10 to 15 cents per mile.
``The penalties make leasing less attractive,'' Orme says. ``It's not easy to get out of a lease.''
The typical customer trades in a car after about three or four years, says Todd Irving, business manager at Ira Olds-Toyota in Danvers, Mass. By leasing, the customer only pays for a portion of the car's life, about two to five years. ``If you trade [a bought car] after three years, there's usually no equity anyway,'' he says, because loan terms have been extended in recent years.
Customers can drive a $15,000 sedan for $100 less a month than buying one, Mr. Irving estimates. ``Because cars are getting so expensive, it's getting more and more costly to buy the car you want to drive,'' he says.
Consumer tastes may be becoming more expensive, too. ``People always want more,'' Irving says, adding that customers sometimes do not want to compromise and buy a less expensive car. With deals that require little or no money up front, people can drive luxury cars for about the same cost as owning a more modest vehicle. Irving says 15 to 20 percent of Ira Olds-Toyota's business comes from leasing, and about 70 percent of its Lexus business is from leases.
In some cases, leasing a car can be a route to buying. When the lessor turns in the car at the end of the lease period, he can choose to buy the car for a price set at the beginning of the lease period. But if the value of the car has gone down, the lessor may be able to bargain for a lower price - and buy the leased car for less than he would have had to pay to buy it originally.
In deciding whether to lease or buy, McCathren says an important factor to consider is the consumer's ``discount rate.'' This is the ``value you put on your cash,'' Mr. McCathren says. ``If you plan to use the cash difference from leasing each month to pay down your credit card debt which has a 17 percent APR [annual percentage rate], then your discount rate is at least 17 percent.''
``The best lease is frequently not the one with the lowest monthly payment,'' McCathren says. Compare mileage allowances, early termination charges, and purchase options, he suggests. ``Although leasing is less expensive and more flexible for most people than purchasing a vehicle for cash or taking out a loan, you have to do your homework.''