The lure of leasing - automobile leasing

Nation's Business, Dec, 1991

Have you noticed? There are a lot more ads in the newspapers these days outlining leasing a car as opposed to financing it. This is because manufacturers are now offering special incentives to push short-term leases.

Bill Galayda, manager of Tischer Leasing, in Silver Spring, Md., gives an example: "A three-year lease on one of my imported luxury cars might have a monthly payment of around $590 because the manufacturer gives me a 2 percent incentive interest rate. On a three-year car loan, the customer would have to pay $980 a month."

The manufacturers are pushing leases because they want to shorten the buying cycle. To keep monthly payments down as car prices went up, manufacturers first extended loan periods to four, five, and six years. "They couldn't extend the loans much further," says Jerry Duffy, manager of the Jefferson Bank leasing department in Philadelphia, "so they switched to leasing, where you are only paying for part of the car--the part you use during the lease."

There are basically two types of leases--closed-end and open-end. The closed-end lease is more popular because you don't have to come up with extra money at the end of the lease if the car's resale value has fallen below the original estimate.

The closed-end lease has some important restrictions however. You pay extra if you drive the car more than 15,000 miles a year, and it has to be in good condition when you return it.

The open-end lease does not guarantee a trade-in value at the end, and, for this reason, the monthly payments are lower. There are similar mileage and condition penalties, but, if you're careful, you could come out ahead. "Customers who don't go over the yearly mileage limit and keep their cars in good condition," says Duffy, "are rewarded with a rebate because the company can get a better resale price."

In a number of instances, buying a car with a loan may be better than leasing. You may want to keep the car for a long time or drive it a lot more than 15,000 miles a year. So, it's wise to compare costs.

"The biggest mistake people make when they lease a car," says Larry Goldstein, a certified public accountant with Ernst & Young in New York, "is not running the numbers to compare costs with financing."

If you are handy with figures, you can do it yourself. If not, have your accountant do it. "But remember," Duffy says, "because of fleet-pricing discounts, you pay less for a leased car at the start."

Be sure to get this information from the dealer or leasing company before you begin your cost-comparison calculations.