Don't Buy a New Car — Lease It

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

But if she saved the down payment and the $132-per-month difference between loan and lease payments, Stuckey would earn about $860 in interest (assuming an annual 5% after-tax return), still leaving her about $1,200 behind. If she invested the difference at 10%, though, the gap falls to $244. That's just $7 a month over the course of the lease--not bad for insurance that lets her turn in the car at the end of the lease if she doesn't want to keep it.

You don't necessarily have to invest the money to come out ahead. Using cash freed up by a lease to pay down debt can be an even better deal. Paying off a credit card balance that's costing you 18% a year is like investing at that rate. "Even if you're using the money for another purpose, it has an implicit value," says Randall McCatheren, of Bank Lease Consultants, in Nashville, Tenn. "Going but to dinner instead of strangling your spouse has a value that is equal to or greater than 17%."

Other factors give a lease a leg up on a purchase. For example, most leases include free gap insurance, which covers the difference between the lease payoff and an insurance settlement if your car is totaled or stolen. It's unlikely you'll find that kind of protection when you buy an automobile. It it's totaled, the difference between the balance due and the insurance settlement comes out of your pocket.

MYTH #2: A lease consigns you to everlasting payments. It's common knowledge that leasing makes sense only for those who get a new car every two or three years, those masochists who hit the showrooms as soon as a loan is paid off. The corollary is that if you love the no-payment years of owning a car you should scorn leasing.

Whoa. Not necessarily. If you want to buy the car at the end of the lease, your contract will give you a right to do so--at a set price. And as the example above shows, you wouldn't be a chump if you went the "lease now, buy later" route. In fact, it affords you some protection. If you no longer want the car at the end of the lease, you can just walk away. If you had purchased the car new, you'd be stuck with selling it or trading it in, and there's no guarantee of how much money you'd get.

MYTH #3: Excess wear and teat charges ate unfair. Not so. These charges are designed to make you pay for your (over)use of the vehicle. You'd face the same financial hit if you had purchased the can Dings in the door or tears in the upholstery would cut into how much you'd get when yon traded it in. The charge on a lease is more in-your-face, but the financial pain should be about the same.

But don't leasing companies pile on charges tot wear and tear? No, says Jerry Mahoney, who provides leasing for American Automobile Association members. "If anything, they have become more lenient, giving the consumer the benefit of the doubt."

MYTH #4: Early-termination fees exact a far heavier penalty than if you change your mind when you buy a car. It only seems that way. If you decide to bail out of a car purchase, you'll pay the piper, too. The car may be worth Jar less than you still owe on the loan. And because depreciation is spread evenly over the term of the lease, if you turn in the car early, you are sure to have "used up" more of the car than you've paid for, particularly if you made no down payment. The early-termination fee is the way the dealer evens things up. Moral Plan to keep your car to the end of the lease. It's a fool's errand to stretch out the term to get lower payments if you're likely to break the lease early.