Car Control

LEASE OR BUY PART II: CONFUSION TO OUR ENEMIES

Last week we began this mini-series on the advantages and disadvantages of leasing versus outright purchase of a new car. We called it a matter of "horses for courses" because the two forms of acquisition are quite different and each has its unique benefits. Although leasing is growing rapidly, representing up to thirty percent of new car sales this year, as the newer kid on the block, it's likely that many readers are not familiar with its principles and the nomenclature. One of the ways that consumers sometimes agree to less-than-the-best deals on any purchase is simply not knowing what the salesman is talking about and being too embarrassed to ask over and over until it's clear. An aggressive (and smart) salesman can put not-so-subtle pressure on you to just take his word that what he's giving you is the best deal.

So if leasing seems attractive to you, here are some fundamentals and some language you should be familiar with:

CAP COST

Cap cost is short for capitalized cost. It simply means the amount calculated as the total price of the car including taxes and fees. Subtract from the cap cost the residual value, and the result is the value to you of using the car for the period of the lease. You can quickly see that the original price for the car charged into this formula and the value placed on it 2-4 years hence dramatically affects what you will pay for the lease.

RESIDUAL VALUE

The lessor, usually a manufacturer's finance division or a local leasing company is taking the risk that when you return the car 3 years hence, it will be worth at resale what they estimated in the beginning. Otherwise they didn't charge you enough for the lease. The good news is that with the recently strong market for used cars, leasing companies are using optimism in calculating residual values. This may lower your monthly payment.

CAP COST REDUCTION

This is an up front payment, somewhat like a down payment, that reduces the amount of the lease and the monthly payment on the balance. In a way it is often self-defeating because the primary advantage of a lease is putting up less in cash and monthly payments than if you bought the car outright. But lessors like it because it reduces their risk and locks the buyer in more tightly to completing the lease contract.

MONEY FACTOR

There are many names for this number, too many to list here but it is basically the lessor's charge for financing the deal. It is based on some complicated present value calculations but for the buyer it basically means, interest rate. This is how much you are paying to borrow the value of the vehicle during the time of the lease. Here again, the lessor is in business to make a profit so they will get the most they can get and still be competitive. There is a real opportunity for the buyer to shop this number, particularly if you have a solid credit rating. And, of course, manufacturers have recently been using this tool to attract new buyers to the lease market.

SUMMARY SO FAR

So here's what you should be looking for if you start shopping for a lease. The lowest price on the car and accessories (Cap Cost) paired with the highest residual value which means the lowest lease amount. Then look for the best money factor or INTEREST RATE on the lease. All of this will result in the lowest monthly payment and the least cost per mile.

GAMES PEOPLE PLAY

Next week we'll look at some other variables like mileage allowances, some tax effects and the conditions which might make you a winning horse on the leasing course.

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:

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Raleigh, NC 27624

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