Car Control

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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OUTRIGHT PURCHASE

LEASING

HERE'S THE ILLUSION

WHAT'S BEST FOR ME

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