Consumer Reports Buying Guide on Leasing:
Lease a 2005 Subaru Outback wagon for 48 months with no money down and pay just $278 a month! Lease a 2004 Chrysler Pacifica with $2,500 down over 39 months and pay only $258 a month!
You'll be seeing more offers like these as manufacturers and car dealers look for lures other than 0 percent financing to get you into a car. And the deals do look tempting. After all, if you bought the same Subaru or Chrysler, financing them over the same time period, your monthly payment could be twice as high. Shouldn't you jump at the chance to lease?
The answer is yes, if you don't mind paying plenty for a car you'll have to return or buy at the end of the lease. The ads don't always show you the true total cost of leasing, which typically includes fees at the front end, fees at the back end, and higher finance charges along the way. Worse, if a year into the deal you decide that leasing is not for you, you can't walk away without paying substantial costs.
"The cheaper way to drive a new car is to buy with a loan and keep it as long as the wheels stay on," says Albert Hearn of Leaseguide.com, a Web site that provides free leasing information. Not everybody wants to do that, however. If you decide to lease your next car, you should understand how leasing works, how much you'll pay, and what pitfalls you could encounter.
Fees coming and going
Many people who lease have wound up with lousy deals because they focus on the monthly payment without understanding how much the car itself costs. Indeed, many leases are based on the manufacturer's suggested retail price (MSRP) instead of a lower price the buyer negotiates. Also piled on top of the MSRP are extra charges for insurance coverage, extended warranties, delivery fees, and other items consumers will have to finance. Over the past decade, the Florida attorney general's office found that at times dealers failed to give lessees credit for trade-ins, down payments, rebates, and dealer coupons.
So here's the deal. When you lease a car, you are not paying for its full value, only its projected loss in value--its depreciation--while it's in your use, typically 24 to 48 months. Over three years, a $30,000 car might lose half its value. The remaining half is the residual value. Paying back only half a car's value, of course, will leave you with a smaller monthly payment.
But there are offsets. First is the mileage restriction. Most leases limit your use to 10,000 to 15,000 miles per year. (Passenger cars average 12,200 miles a year.) Then there is a raft of fees. One biggie: the "lease acquisition fee," usually about $600, levied by the automaker or finance company underwriting the lease. It isn't always broken out on the contract, and dealers may quietly jack up the fee and pocket the difference. You may also have to pay a security deposit, which typically equals one month's lease payment. It's refunded unless you default.
When you turn in the car at the end of the lease, you will encounter another set of fees: the "lease disposal fee," which runs about $395; and 15 to 30 cents per mile for exceeding the mileage limit in the lease agreement. (Drive fewer miles, and you've wasted your money for depreciation you didn't use.) Finally, there are charges for "excess wear and tear," which cover all but the smallest mechanical or cosmetic fixes.
The money factor
Another significant cost is the lease finance charge. You might not think you'd pay a finance charge on a car you're just borrowing, but consider this: When you drive away in a $30,000 car, you're tying up someone's investment, just as if you took out a loan. So although you're not buying the car outright, you'll still be paying monthly finance charges.
Complicating the matter is the fact that the finance charge is not usually expressed as an interest rate but as a "money factor." To determine the equivalent interest rate, multiply by 2,400. The finance charges for lessees are generally higher than for buyers. Worse, dealers sometimes simply mark up the money factor.
The finance charges on a $30,000 leased car over a three-year period might be around $3,898, or about $1,027 higher than with a three-year loan, even if the annual interest rate for both was 5.7 percent. The extra lease costs would be partially offset by lower sales taxes. (Most states charge sales tax on lease payments instead of on the entire value of the automobile, as they do on a loan.)
Other roads to a lower payment
So a lease isn't the cheapest way to go. But what are you to do if you can't afford loan payments for that shiny new ride?
One option is a car loan with a longer term. As a general rule, loans are less costly than leases of the same duration and interest rate. And a long-term loan, say over 60 months, is likely to cost much less than leasing twice over the same period, assuming you'll keep the vehicle for the entire length of the loan. If your plan, however, is to sell or trade in the vehicle early on a long-term loan, you could pay more than if you'd simply leased to start with.
You might also consider purchasing a reliable, well-maintained used car. After all, it's new to you. Many cars operate well even when they are a decade old.
What to do
If you decide to lease, make sure you understand the deal before signing anything. Here's how to avoid overpaying.
Learn more. Before stepping into a dealership, visit
www.leaseguide.com and
www.leasetips.com, and read the Federal Reserve's consumer leasing guide at
www.federalreserve.gov/pubs/leasing.
Negotiate the car price. Before even whispering the word "lease" at a dealership, haggle as if you were buying. Only after you've settled on a price should you announce that you want to lease. Price information is available from the Consumer Reports New Car Price Service and at other car Web sites.
Buy extra miles up front. If you know you'll drive more than the agreement allows, ask for more miles to be included in the lease. The extra cost won't be as high as an excess-mileage penalty. Some finance companies will give you a refund on miles purchased in advance that were not used.
Study the agreement. Pay particular attention to restrictions, penalties, and end-of-lease procedures. Verify that everything is exactly as you negotiated. Examine the capitalized cost, which is the sum of the negotiated vehicle price and any fees, minus the value of any trade-in and down payment. If it's higher than you expect, don't sign until you find out why.
Check the calculations. Before signing, write down the lease specifics and verify the numbers using a lease calculator, such as the free one at
www.bankrate.com. You'll need to jot down the capitalized cost, term, residual value, and money factor. Remember to multiply it by 2,400.
