With the average price of a new car topping $22,000 these days, many car buyers choose to lower their payments through leasing. Others may just buy used. Now they can lower payments even more by combining the strategies into one, and leasing a used car.
Yet buying vehicles coming off two- or three-year leases can also be expensive option. Just check the ads in your local paper. Most of these cars run in the $10,000 to $15,000 range.
Used-car leasing is finding a new niche, especially among so-called entry-level luxury cars - low-end BMWs, Cadillacs, Lexuses, Jaguars, and Audis - that many aspire to own, but can't afford to buy.
The biggest growth in used-car leasing comes in "certified used cars," trade-ins backed by a manufacturer's extended warranty. BMW leases many of its new cars twice - once when they are new, and a second time as used, with less than 60,000 miles on the odometer.
As cars become more reliable, this equation becomes less risky for consumers.
Three years ago Lisa Lund leased a used 1997 Audi A4 for $320 a month for three years. "I only drive about 10,000 miles a year, so this way I can drive a more expensive vehicle," she says.
Ms. Lund, who runs Majestic Wholesale Outlet, a family-owned used-car dealership in Bay City, Mich., says the leasing business there has dropped off from almost 50 percent of sales to only 5 percent. Reason: Banks have lowered the residual value of vehicles, raising monthly payments to the point where buying a new car can make more sense.
"Two years ago we could lease a Jaguar for $299 a month. Now you can't lease a Grand Am for that," says Lund. Today that Jaguar would cost $461 a month to lease, or $595 a month to buy, she says.
Whether used-car leasing will expand or contract depends on whom you ask.
Many banks are getting out of the business after being soaked with inflated residual values in the late 1990s. GE Capital abandoned leasing altogether. Bank One spokesman Tom Kelley says the bank is trying to cut its lease business to about one-quarter the size it was two years ago.
But BMW is successfully re-leasing many of its originally leased vehicles, complete with extended warranties. For example, when the first lease expires on a 1999 328i with 30,000 miles on it, the company may lease the car again to another customer for three more years and a maximum of 60,000 miles. The monthly payments may be less than $400. Since these "preowned" cars are certified by BMW, they come with warranties to cover most major mechanical problems.
Dennis Magers, Internet sales manager at Advantage Auto Leasing in Plano, Texas, is also bullish on used-car leasing. His customers inhabit a rarefied stratosphere - with incomes high enough to afford $135,000 Mercedes-Benz S600s.
Used-car leasing has several advantages for this clientele, says Mr. Magers. Since depreciation on a $135,000 car can be fierce, leasing provides customers with a guaranteed value when they want to unload the vehicle.
Not that such buyers pay that much in the first place. Or that the cars are really old. In Mr. Magers's example, his customer signed a two-year lease for a $70,000 Mercedes that was one year old with less than 10,000 miles. It's residual value was about $50,000. With the economy in a slide, depreciation over the next two years could be steeper if he had bought the car. So the lease gave the customer a guaranteed residual value.
As used cars become more expensive, Magers expects a growing number of buyers to move toward leasing to reduce payments.
For consumers, leasing a used car is much like leasing a new one. Monthly payments are based on the time period that you drive the car. But since new vehicles depreciate more rapidly than older ones, used-car leasing is a much cheaper option.
But there is one caveat: Leased new cars are backed by the factory warranty; most used cars aren't. So people who lease used cars could get stuck with repair bills on top of their monthly payments.
Lund encourages her customers to buy an extended warranty to cover potential major repairs. She then rolls the warranty cost into the monthly lease payments.
Customers also find that banks generally only write used-car leases for two or three years, not the four or five years extended to new cars. (Banks don't want to own six-year-old cars.)
As with new-car leasing, used-car leasing works best for drivers who want to trade cars often.
"Many luxury-car buyers want to drive, say, a blue Mercedes for a couple of years, and then they want something different," says Mr. Kelley at Bank One. Like a silver one, for example.
For those people, used-car leasing may be the right move. "I see people every day who make really poor financial decisions because they want more than they can afford," says Steve Rhode, president of MyVesta, a national credit counseling service in Rockville, Md. "Maybe this would help them.
"I wish companies would just call [leasing] what it is - a long-term rental," adds Mr. Rhode.
In any case, Kelley, the banker, plans to drive his car, an eight-year-old minivan, into the ground.
"Buying a car isn't always a financial decision. Every night on my way home, I drive past a Mustang convertible with a 'For Sale' sign, and I think 'Oh, man!' " (He'd love to buy the car.) "But with a 15-1/2-year-old son about to need auto insurance, I need a Mustang convertible like a hole in the head."