Don't Buy a New Car — Lease It

Kiplinger's Personal Finance Magazine, Dec, 1998 by Ed Henry

Even if you want to own a brand-new '99 "lease now, buy later" could be your ticket to the best deal.

Isn't it ironic? The average car price fell during the 1998 model year--by 1.1%. As 1999 models roll into showrooms, Ford is actually trimming overall prices, GM is holding the line and Chrysler is pushing an infinitesimal 0.1% increase.

Foreign carmakers, stuck in the world's economic doldrums, are in the same boat. Mazda is shaving the sticker price on its new luxury Millenia S by $5,550, or 15.2%, and knocking 4.1% overall off its 626 and all-new Protege cars. Other Asian manufacturers kicked off the new-car season with the kind of cost-cutting incentives normally reserved for later in the model year.

"Automakers have no choice," says William Wilson, an economist for Comerica Bank in Detroit. "They're forced to lower prices to promote sales."

The combination of steady or falling prices, lower interest rates and rising family income is making new automobiles more affordable today than at any time in 18 years, according to Comerica economists.

So here's the $64,000 question: If cars are so darned affordable, why do so many buyers have the urge to run screaming from the showroom when they confront the monthly payment for a new-car loan?

Consider the jaunty Chrysler 300M, a car that trades on the mystique of the company's performance cars of the 1950s and 1960s. If you cut a $29,000 deal on a well-equipped model, put 10% down and get an 8,5%, three-year loan, the monthly payment will be $824--about as much as the 30-year mortgage payment on a $160;000 house. Stretch the car loan out to four years, and you're still facing a monthly payment of $637.

That's affordable? Imagine, if you dare, the payments on a $49,000 Cadillac or a $65,000 Mercedes.

Regardless of what the statistics show, few of us are able, or willing, to slip a $600 or higher car payment into the family budget. What about leasing that $29,000 Chrysler? On a 48-month contract, the monthly payment would fall to $461--steep, yes, but 28% less than the four-year loan.

The year of the lease

Numbers like that explain why leasing is likely to be bigger than ever this year. Of the 15 million new cars and trucks that will roll out of showrooms, more than one-third of them, 5.4 million, will be leased. When it comes to vehicles costing more than $40,000, 61% will be leased, according to Art Spinella, general manager of CNW Marketing/Research, in Bandon, Ore.

Joann Curcio is one happy convert. When first smitten by GMC's luxury sport utility, Curcio, 28, looked at the Yukon Denali's $43,000 price tag and made a quick decision. She earns a comfortable living as regional vice-president of a Long Island mortgage-banking company, but there was no way she was shelling out $850 a month--what the vehicle would cost with a four-year loan.

"I'd rather put money into my house than deplete my savings to pay for a car that depreciates right off the bat," says Curcio. "I know the present value of money, and that's why I'd never put $10,000 down on a car. When you lease, you're a lot better off." There was no down payment on her 24-month lease, for which she pays $597 per month. "In two years, I can walk away from the car and into another if I want to," says Curcio.

Aha, you're saying. She'll own nothing at the end of the lease and have nothing to show for $14,000-plus in payments. Everybody knows leasing is far more expensive than buying, and the payments never end.

But that ain't necessarily so. To go into the 1999 car market with your eyes open, you may need to forget some of the things you know about leasing.

"There are three or four key misconceptions which make up the core reasons some people shy away from leasing," says Cedric Rashad, head of the Rashad Group, a leasing consulting firm in Atlanta. Some of those deep-seated myths are well founded in abuses of the past. But the market is different now. For one thing, federal law demands that the key terms of a lease be openly disclosed.

MYTH #1: Leasing a new car costs far more than buying it. A hard look at the numbers reveals there's more parity than most people realize. Just as the lower monthly payments don't automatically make a lease vastly cheaper, neither does the fact that you own nothing at the end of a lease mean you're throwing your money away.

To compare buying and leasing fairly, you must take into account the economic power of money you don't put into a down payment or sky-high monthly payments on a purchase deal.

Eileen Stuckey doesn't consider herself a spendthrift. In fact, she thinks she got a good deal on her 1999 Mercury Cougar. The 33-year-old Marlton, N.J., loan officer is paying $381 per month on a 33-month lease. If she had purchased the car for $18,800 (the price built into the lease) with a 33-month note at 8.5%, her payments would have been $132 more $513 per month. At the end of the lease, Stuckey can buy the car for $10,182.

If she had bought the car new, her out-of-pocket cost after 33 months would be $20,679. So if she buys the Cougar at the end of the lease, she will have shelled out $22,775. At first blush, she's about $2,000 behind.