LEASE OR BUY PART III: GAMES PEOPLE PLAY
In Part I and Part II of our mini-series, Lease Or Buy--Horses For Courses--we covered several
fundamentals of leasing. Not the least of these was the possibility that, if the buyer is not
diligent, the car, the object of the lease itself, may go into the computations at a higher
price than if the buyer were strictly negotiating for the best price on an outright purchase
from among competing dealers.
We took some flack on that point from Dan Belmonte, King Of The Lease at one of the Triangle's
more prominent sellers of expensive European imports. In a recent interview, Belmonte insisted
that he will negotiate the price of the car for the customer before doing the lease-or-purchase
calculations. We've talked to others who also say they will handle the calculation that way.
Nonetheless, the fact remains that the basic elements of the lease and the question of best
value or lowest cost of use rely on those elements outlined in Part II, namely car price
including optional accessories, projected resale value at the end of the lease (Residual Value)
and the Money Factor or interest rate. These determine how much it will cost to use the car over
the length of time you own/lease it. More often than not, buying and holding the car to the end
of the loan (say 36-48 months) and then selling/trading it in will yield a lower cost per
year/mile/whatever than a lease.
However, Belmonte claims that he is leasing 70% of his deals and he admits that some of his
primary manufacturers are making leasing more attractive by offering low interest rates in the
Money Factor (below the interest rate for bank car loans) and high Residual Values, both of
which reduce the amount of the lease. Then they kick in all the periodic service checkups for
free during the lease. Painless ownership. Why? Read On.
CONSPICUOUS CONSUMPTION AND OTHER ADDICTIONS
The auto makers have locked on to a new social phenomenon. Higher disposable income equals permanent car payments. They have discovered that as a by-product of the lengthening of car loans in the '80s from a traditional 36 months all the way to 60 months--itself a by-product of more expensive car
s--there is now a body of consumers out there WHO NEVER COMPLETE A CAR LOAN. These folks just roll over one loan into another and have a permanent car payment in their budget. For them, "buying" only the piece of the car that they actually use, say its first 36 months, (including 10% depreciation)
instead of the whole thing, as in a purchase, means a much lower monthly payment.
To this market it matters not what the net cost per month may be over the life of the car
including those years when they might have no payments to make. What matters is how much car can
they get for the monthly payment they can afford. The added benefit is that, in most cases, the
car is under warranty the whole time of the lease. To them, freedom from hassle and a new car
every 2-3 years overshadows any premium they might pay in cost per mile of operation.
GOTCHA
Another discovery by the auto makers during the doldrums of the early '90s is that if you make
the monthly payment low enough you can attract some people from the used car market to move into
a new car. And once they are hooked on that low monthly payment and that new car feel, they
never want to go back to owning. The secret?
Get your finance division to lower the interest charged into the Money Factor and offer
optimistic Residual Values. Shazam! In effect, they bolstered new car sales, kept the factories
running and built new customer loyalty by simply lowering interest rates and taking some risk on
the future value of the used car. It worked.
There are now several million people out there who only want to know from the salesman if their
last raise at the office was enough to put them in a little better car next time around. Cool.
"How much is the rent?" not, "What's your best price on this car?"
NEXT WEEK, "ENOUGH ALREADY"
In Part IV, the last in this not-so-mini-series ("Thank heaven," they sighed), we'll study the
tax aspects of leasing versus owning, the issue of mileage allowances and present a little quiz
to help you decide if leasing might be for you.
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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