Pros and cons of leasing a car

Ebony, Nov, 1998

With new car price tags rising, many people are investigating options such as leasing as a way to drive their dream cars without busting their budgets. Marcus Lawless, a financial services advisor for Consumers Car Club, says, "Leasing is growing, since you get more car for less money." He adds that another factor in the surge is that leasing is now safer for the consumer than in the past -- thanks to new federal laws that keep the consumer from "getting ripped off" by vague contracts.

While it's true that leasing is an increasingly popular alternative to buying a new car (almost a third of new vehicles leave the lot under lease), experts say there are a few things to consider before deciding to lease or not to lease.

WHAT IS LEASING?

When you buy a car, you pay for the entire value of the car. But when you lease, you pay only a portion of the car's value. The portion you pay is based on how much the vehicle depreciates, or loses value, while you have it. Depreciation is calculated by taking the value of the car when it's new minus its value at the end of the lease. In addition, expect to pay a lease rate -- similar to an interest rate -- on that amount.

Leasing a car works like renting an apartment. You put down a refundable deposit and your first month's "rent" and sign a contract (lease) that guarantees you the right to use the car for a specified time. This time period, known as the lease term, is usually between two and four years. Similar to an apartment, you pay your monthly rent to the owner of the property -- in this case, the car leasing company.

PROS AND CONS OF LEASING

A major benefit of leasing over buying is that it allows you to drive a better car than what you normally could afford. "Since you're only paying for a portion of the vehicle's value," Lawless says, "your monthly payments are substantially lower and you have a shorter term -- typically three years -- than if you bought a car and financed it for [five years]."

Leasing also gives you the advantage of owning a new car every few years, and if you use the car for business, leasing offers a more attractive tax write-off than buying.

However, don't let the allure of low monthly payments and short lease terms blind you to some of the realities of leasing. For starters, you won't own the car, you just pay for the privilege of driving it. While many leases come with an option to buy at the end of the term, if you intend to purchase the car, some experts say it probably makes more sense to buy it from the start. Plus, if you want to get the best leasing deal, having good credit helps.

If low monthly payments are what you're after, then you might come out the same, or even better, buying a later-model used car than leasing a new one. Also, don't forget about insurance and repair costs, because you're still responsible for them when you're leasing. Plus, you could end up paying more for insurance if the leasing company requires that you have additional coverage.

Mileage is another big issue to consider since it's a major part of your leasing contract. "Leasing is not something you want to do if you're commuting 200 miles every day", Lawless warns. Most contracts have a cap on the number of miles you can put on a car each year since the more miles on the car, the less it's worth at lease end. You typically receive between 12,000 and 15,000 miles annually, although you can negotiate for a higher limit. However, if you surpass the cap, be prepared to pay a stiff penalty at the end of the lease -- anywhere from 10-20 cents for each extra mile.

GETTING A FAIR DEAL

Whether leasing or buying, getting the best deal is the bottom line, so you must do your homework. Experts say that if you're buying a car, you shouldn't pay more than 5 percent above invoice price. Before you step into a showroom, look on the Internet or check out consumer car guides to find out the invoice price because the dealer most likely won't give it to you. Get pre-approved for a car loan through a bank or credit union. At home, determine what you can reasonably afford to spend on monthly payments. When you get to the dealership, negotiate and settle on a price before you talk financing. Experts say that for every $1,000 you knock off the selling price, you save $30 on your monthly payment.

If you decide to lease, understand the influence the vehicle's residual value -- the car's value at the end of the lease -- has on your monthly payment. In general, the greater this value, the lower your monthly payments. However, this can have a backlash effect if you want to purchase the vehicle at lease end.

Also don't stop at just one dealer. Comparison shop. Haggle the price down and the options up. If researching, haggling and comparison shopping all make you faint-hearted, there many services that do the legwork for you, usually for a small fee.

Finally-, read the fire print and understand what you read. If necessary, insist on a breakdown of the charges. If you don't like the terms of a contract, don't sign it. And remember that whether you lease or buy, it pays to be knowledgeable. Otherwise, you might get taken for a ride.