While I'm out on vacation this week, we're re-posting some of our favorite stories from the past.This story was originally posted on March 10, 2008.
In our search for a new car, my husband and I spent weeks poring over advertisements in the Sunday paper, but we always got sidetracked by the lease offers. Stylish cars, like the Volkswagen Passat, could be ours for only $329 a month and no down payment—significantly less than we were prepared to pay to buy a car.
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Most personal finance experts, however, consider lease deals to be the poisonous apples of the auto industry. Tempting, but always a bad idea. With a lease, the argument goes, your monthly payments build no equity, and at the end of your contract, you're left with nothing. But that reasoning doesn't take into account the subsidies that manufacturers and dealerships often offer on leases to persuade consumers to drive more cars off the lots.
Leases appeal not only to higher-income individuals who like to drive new cars but also to the budget conscious, because the monthly payments are typically about one half to two thirds the amount of payments on purchased vehicles, says Art Spinella, president of CNW.
Philip Reed, senior consumer advice editor for the car information site Edmunds.com and a former car salesman himself, recalls using leases to reel in customers on slow sales days. "Salesmen like leases," he says. "You'd say, 'What if I could get you lower payments and a lower down payment?' Then, the leasing begins."
Manufacturers and dealers can lower the price of leases even further by using inflated residual values, which is the estimate of what the car will be worth when the lease is over. That figure is then subtracted from the car's current value to calculate the monthly payments for the duration of the lease. The financial arm of the auto company is often willing to absorb that price difference in order to move more cars, explains Tom Libby, senior director of industry analysis at J.D. Power & Associates.
Sometimes, demand drives up the price of certain models. If you happen to have leased one of those hot cars, then buying it for its residual value at the end of its lease can be another way to win.
Deals. The safest way to come out ahead while leasing is to pick the car that comes with the largest subsidy, usually one of the less popular models. Unfortunately for our bank account, my husband and I had a specific car in mind that we really wanted—a Ford Escape Hybrid, which didn't come with any special leasing deals at the time. (Of course, our decision to buy a new car at all, instead of a used model, was already an expensive one.)
Our selection was based partly on the fact that my husband's father retired from Ford, which gave us an employee discount. Plus, because we plan to keep the car for the next decade, spending $27,000—a $9,000 down payment and $420 monthly payments for four years—should pay off in the long run. In contrast, leasing a new Passat at $329 a month would have added up to almost $12,000 after three years, and then we'd have to start all over again. So we bought the Escape.
Trying to decide what's best for you? Here are the key factors to consider.
The cost. Manufacturers and dealers often offer subsidies on leases to encourage consumers to drive off in one of their cars. The best deals are usually on slower-selling models. To evaluate whether or not you're getting a good deal, focus on the four factors that determine how much money you will end up spending, says Reed. Those factors are the monthly payments, the length of the lease, the down payment, and the mileage restrictions on the lease contract. Exceeding the mileage restrictions often leads to hefty fines, and keeping a lease for longer than three years usually forces the driver to pay for new tires and other maintenance costs.
Your budget. While leases usually offer the cheapest short-term deals because they often come with no down payment and low monthly costs, they are almost always more expensive than buying a similar car and keeping it for a decade. Of course, continuously leasing new cars, while more expensive, means always having a relatively new car. Drivers who prefer to replace their cars every few years with a new one save money by leasing instead of buying.
Life plans. Think you may move across country in three years? Or go from being a single professional to the parent of three? For consumers anticipating major life changes, leasing can provide much-needed flexibility. Selling a compact car after three years and replacing it with a minivan, for example, would be more expensive than leasing the first car and then simply returning it.
Driving habits. Leases often charge consumers for any damage to the car, in addition to exceeding mileage restrictions. That's why Spinella warns people who drive a lot, or are hard on their cars, such as Rottweiler owners, against leasing. "Excess wear and tear can cost you a lot," he says.
More numbers. Edmunds.com offers a buy-versus-lease decision calculator, which considers taxes, financing terms, and other factors to help consumers make their decision.