LEASE OR BUY PART I: A CLASSIC CASE OF HORSES FOR COURSES
The Auto Advisor is frequently asked whether it is better to buy a car or lease one. If ever
there was an appropriate place for the frustrating reply, "It depends,"
this is it. It really depends. This week and next (because this ain't no simple deal) we'll
examine the major differences between leasing a car and an outright purchase and see if one or
the other has sufficient advantages to make it a clear winner in the "How To Buy a Car" derby.
OUTRIGHT PURCHASE
Here you shop around for the car you want, gather offers of price from various dealers, and
choose the offer that satisfies you best. Presumably that includes the price of the new car and
accessories, less the value the dealer places on your trade-in. You are faced with financing the
difference between the price on the new car and the value you accept for your old one plus, of
course, local taxes, title and insurance. You will finance at local market rates unless the
manufacturer is offering a finance deal.
You make the payments for the specified number of months and you own the car. Then you start
all over again. Many people start all over again before they own the car. Finance companies
loooove them.
LEASING
Here you find the car you want and then ask the salesman "What's the monthly payment on a
lease?" He adds up all the costs he can think of which include the retail price (usually
un-discounted), adds in the finance cost to him for investing in the car (the dealer or his
leasing company actually buys the car, not you) for the term of the lease, plus taxes, title and
insurance and subtracts what he thinks the car will be worth at the end of the lease, say four
years from now when you bring it back. US cars are typically expected to lose 60-70% of their
value over a four year lease. Imports from 55-65%.
All that is the value of the lease. Now we should presume that this guy didn't get to be a
dealer by being stupid or generous so he's likely gonna up his expected costs and down his
expected resale value. Whatever the number he gets, that's what he's going to divide by 48
months and quote you as your monthly lease payment.
When you compare that payment to a conventional loan payment, that monthly lease payment WILL
LOOK REAL GOOD. Why? Because you are basically renting the car only for the period that you use
it and not for its entire life as when you buy it. Probably the manufacturer has also financed
it for a lower interest rate than your bank charges just to get the car sold.
HERE'S THE ILLUSION
But the big trick in this equation is simply that the lease payment is really just rent on the
car for the lease period. You never own it and you don't pay for life you didn't use. And
because the monthly price is low, you may not pay attention to the details. Thus the dealer may
charge into the lease calculation a car at full retail and optional accessories at full retail,
items that he would normally sell outright at a much lower price.
A second anomaly is that you get no benefit from being a careful owner. When the dealer
estimates what the value of the car will be 3-4 years from now he has no way of knowing how well
you will have taken care of the car. To protect himself he assumes the worst and includes in the
contract a penalty on you for excess mileage, so much per mile (10-15 cents) over about 15,000
miles per year. And you don't get a refund for beating your mileage "quota". So you are paying a
rate of depreciation based on the average person and not on your own meticulous car care habits.
WHAT'S BEST FOR ME
Next week we look at which of your horses is likely to win on the lease course. For some, leasing
makes good sense, but for others, well, they'd be definite losers.
David Thompson is President
of Auto Testers, Inc., publishers of The New Driver Car Control
Clinic, a program to help parents make
their new drivers safer drivers.
Questions should be addressed to info@carcontrol.com or:
The Auto Advisor
P.O. Box 99466
Raleigh, NC 27624
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