Used luxury car? Think lease

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."

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