No question seems to polarize financial experts more. But beware: some of the experts are less expert about the car market than they think.
Even the fantastically successful Suze Orman who cranks out best-sellers about pathways to wealth and happiness though rich advises her readers to definitely buy a car rather than lease. She says you wouldn’t want to lease your life; you’d want to own it. A head-shaking non sequiter.
Another expert misapplied real estate reasoning to car buying. That argument: car payments toward ownership were establishing equity; leasing, like renting a house instead of buying, was not. The reasoning here is equity is good, therefore financing a car is better than leasing.
Slight problem. “Equity” in a car is close to meaningless unless the name on the hood is Duesenberg, Delahaye or the like. Cars are more like refrigerators than houses. You use them and then you replace them.
So what’s the truth of the matter? Is leasing or buying better?
Here comes a waffling answer: It all depends. (As I will explain.)
Here is something definite: ‚“If it appreciates, buy it; if it depreciates, lease it.‚” So says J. Paul Getty, no financial amateur.
And cars most certainly depreciate. The minute you drive a new car off the lot it’s worth thousands less than when you signed the papers. So don’t let an “expert” discourage you from at least considering a lease.
To start at the beginning there are three ways to acquire a car (Well, five, but theft is illegal and outright gifts are rare.)
(1.) Pay cash. (2.) Finance the car, paying off a loan in monthly installments. (3.) Lease the car with monthly payments.
Paying cash is like buying panty hose. You pay the money and the merchandise is yours. With no interest charges the car, in itself, will cost less than either leasing or financing. But possibly if you invested the cash while paying for the car over time you might make out even better. Worth thinking about.
Financing a vehicle is the most common approach. Depending on your credit rating, the prevailing interest rates, the car of your desires and how good a negotiator you are you might emerge with a terrific deal. Keep up the payments and at the end of the coupon book the car is all yours for good or ill.
Leasing a vehicle means you can do the same negotiating as you might as a cash buyer or loan recipient. With the dealer you establish a car’s price, the value of your trade-in if you have one, any down payment, the interest you will pay in much the same way. Then you make monthly payments for a fixed period of time. (Usually three years.)
But here is where the differences start to show: with a lease your monthly payments are far less than those on the financed car. Maybe half as much. (Remember you are not paying for the car, you are paying for the use of it.)
At the end of the lease the most important difference appears: the lessee has choices that no buyer has. You as lessee can decide whether you want to buy the car or simply walk away.
When you signed the leasing contract something called the residual value was written right into it. This is a projection of future value established by the leasing company; it’s a guarantee that your vehicle will be worth at least that much when the lease is over. It is written on paper but it is set in stone.
What does this mean to you?
It means the value of your leased car has a floor under it. You need not be concerned about a depressed market down the line or a sudden drop in market value. New models are coming to the market faster than ever. The trend is to have added content without a parallel price increase. In short: a better value. This devalues the older models instantly.
How are you affected?
Say you and your twin sister live in the same town, buy from the same dealer and both fix your desires on the same car model.
She buys, you lease. (You are not identical twins.)
Your sister’s car payments are greater than yours. She says she doesn’t care because she is buying a car; you are paying for use.
After two years a hot new model of your car hits the auto shows. Both of your cars are suddenly dated, suddenly worth far less as used cars. This worries your sister at first, but then she keeps her cars for a long time anyway. The market doesn’t matter to her. She says.
The next year you both have reached the end of your payments. She owns her car. Your lease is ended. What do you have?
The residual value in your contract is now higher than the real market value of your car. You’d be a fool to pay that much, so you don’t. You take the car back to the dealer.
There you can leave it, dust your hands and take a taxi home.
Or before you go you can negotiate with the leasing company to buy the car at a lower price than the residual value. You are in the strongest position possible. The leasing company knows the car is worth less than the guaranteed price and if he takes the car back (which he has to if you don’t want it) it would be resold in a depressed market. He can sell it for you and avoid the hassle. Indeed, some leasing companies have been known to take the initiative and call a lessee with an attractive offer as the lease nears its end.
If you reach an agreement you are in the same boat as your sister - both are car owners. Except that you’ve paid far less than your sister has.
OR you can lease something else; maybe the newer model. (With about the same outlay as your sister you’ll be driving a car three years newer. And you’ll be guaranteed another residual value giving you a window on the future.
A different scenario: Say the market value of your car at lease end is actually greater than the listed residual value. More choices: you can buy the car at the stated price, sell it and make a profit; or you can buy it and keep it. (Still having paid less than your sister.)
The twins were actually paying for quite different things for their twin cars: the buyer was paying for the entire car and its depreciation; the lessee was paying for the difference between the original price of the car and its residual value.
Looked at this way it is understandable that leasing an expensive car that holds its value can actually cost less than leasing a less expensive car that does not.
What’s the catch? None really, but still leasing is not for everyone.
Here’s a brief profile of a poor candidate for leasing:
• The idea of ownership (“mine, all mine!”) is truly important to you.
• You like to personalize your car with special wheels, add-on gadgets, engine performance chips etc.
• You are really hard on cars collecting dings, dents and scratches while your dogs are tough on the interior.
• You really rack up the miles (upwards of 25,000 a year.)
• You may not be able to fulfill the contract.
Just as you cannot express your extreme decorating tastes in a rental property you cannot customize a leased car unless you want to pay serious damage fees. And some leasing companies are very strict about what constitutes a well cared for car. (Be sure you understand how strict before you lease.)
It can cost you dearly, too, if you drive more miles annually than is stated in the lease. Those extra miles are treated like rental car miles. When you negotiate your lease make certain you are accurate in your mileage estimate. Agreeing to higher mileage raises your monthly payments but saves in the long run.
Though most car leases specify annual mileage of 10,000 to 15,000 a lessee who wants as much as 25,000 miles can get it from most leasing companies. Furthermore the lessee will come out better in the long run than a buyer who drives that many miles. The more expensive the car the greater the lessee saves over the buyer. Again: realistically specify the mileage up front so the cost of the miles is built into the lease. This stipulation costs appreciably less than you would pay for excess miles at lease end.
And be as sure as you can be that you will be able to make your monthly payments for the full term of the lease. A car lease is a firm contract and terminating it early will cost you dearly.
Another drawback to leasing loomed in a recent court decision in New York State which could make it easier for manufacturers to renege on warranties. The law, which puts the power of the federal government on the side of the car owner, uses the term “buyer.” New York’s Court of Appeals strictly interpreted that to exclude a lessee. Other states could follow that lead. The case involved the lessee of a Jeep Grand Cherokee, a vehicle that turned out to be seriously flawed. After many failed attempts to set it right DaimlerChrysler refused further warranty claims. The court decided in their favor.
Lemon laws still apply whether a car is bought or leased.
Here’s a profile of a good candidate for leasing:
• You want the same monthly payment to put you in a more expensive car than you can get credit to buy outright.
• It’s important to your image or your business to have a new vehicle every two to four years.
• You would rather invest your money than tie it up in a large down payment and high monthly payments.
• You take good care of a car.
• You know with fair certainty how many miles you will drive each year.
• You like knowing exactly how much your car will be worth at lease end, regardless of market or currency fluctuations.
• You like to avoid haggling with a dealer over the value of your “trade-in” when it comes to acquiring another car.
If leasing begins to look like a no-brainer then hold on for a moment. As Fred Vang, a Personal Automotive Consultant in Santa Fe, NM warns: “It must be a good lease.” He is a great proponent of leasing but he has guided many clients through the perils that can spoil a transaction. “There are more shells in the game in leasing than in buying,” he says, so the lessee needs be diligent.
Here are the qualities of a “good lease:”
• The purchase price on the lease (called ‚Äúcap cost‚Äù for capitalized cost) should be the same (or less) as the outright purchase price of the vehicle.
• The interest (or ‚Äúmoney factor‚Äù) should be the same (or less) as that of the best interest rate for a car loan to buy the vehicle.
• The lease must be ‚Äúclosed-end‚Äù meaning that the contract states up-front what the car will be worth (residual value) at lease end.
• The stated miles-per-year usage must be realistic.
• All the fees (disposal fee of around $250) and costs must be expressed and any “promises” must be in writing.
To lower the monthly payment a salesman might suggest stipulating lower annual mileage (12,000 miles is a common figure). That happened to a daughter of one of Fred’s client. The salesman dropped the amount to 10,000 and told the son-in-law: “Don’t worry about that. We can deal with it when you return the car.” At lease end the extra miles on the odometer more than wiped out any savings made on monthly payments. Just as the salesman (long gone) had surely known it would, but he wanted to close the deal.
• Do not count on anything verbal; what’s written is gospel.
• Research everything carefully.
• Before you sign have any contracts vetted by someone knowledgeable about leasing contracts.
• Make sure the contract accurately reflects what you agreed on verbally.
And whether you lease, finance or buy outright play it cool:
• Do your research and know your car and its value.
• Never negotiate based on monthly payments.
• Say nothing about a trade-in until the new car price is settled.
Fred, anything else car shoppers should know? “Yes. Rebates and incentives change the picture almost daily. Keep abreast of these for the best deals however you plan to pay for your car.”
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