Buy vs. Lease
You might be surprised by which option is best during these trying times.
When leasing a car first became popular in the '80s, it was a logical enough proposition with simple pluses and minuses. Just like renting anything else, leasing wasn't the most economical way to own something long-term. Factors such as restrictive mileage limitations (and hefty penalties thereafter) and carefully calculated residual values made buying the car at the end of the lease downright foolish. But it was a way to drive the latest expensive machines for a relatively low monthly payment, which is probably why leasing became standard operating procedure for people who placed more importance on keeping up with the Joneses than they did on economic efficiency or long-term ownership. Bottom line, leasing was great if you were a clean person who rarely drove, but if you were in it for the long haul and not so concerned with having the latest, greatest thing, buying was the best option. But all of that has changed in this unpredictable economy. For the first time in history, it actually might be a better time to lease than to buy.
Pluses and Minuses of Leasing
To the typical lessee, perhaps the best aspect of a lease was that dealers bought the car back at the end of the term, regardless of its current value or demand. Furthermore, dealers realized it was to their benefit to ensure that these rentals were taken good care of, because after all, they'd own the car at the end of the day. In most cases, when you leased a car, you'd get not only the new-car warranty, but also free maintenance for the duration of the term, which is even more likely today.
Despite the obvious pluses, the downside was simple: You paid for the convenience. At the end of the lease term, it almost always would have been cheaper to buy the car outright and use it over more years, taking advantage of decreased depreciation over time and selling it when you were done. You didn't really think the car dealer was trying to help out little old you, did you?
The Basics of Leasing
For the most part, leasing works the same way today. At the end of the day, you don't own anything, just like the movie you rented from Blockbuster on Friday. But it's really only slightly different than financing an auto purchase. You first negotiate the price of the car (called the "capitalized cost" here). Unlike buying, you'll pay tax only on the leased portion of the car (in most states), as opposed to the entire value of the car.
Your lease payments will be subject to a "money factor," which is like an interest rate. Most dealers will try to keep this a secret, but you'll want to figure out the rate before signing on the dotted line, as you would if you were financing.
Unlike buying, the value of the car at the end of your lease term (called the residual value) is calculated in advance. That's what it'll cost to buy the vehicle, or you can simply give it back. Sometimes, you'll be charged a "turn-in fee," which we'd suggest negotiating out before the start of the lease.
Leasing could mean penalties if you drive too much and, more importantly, if you take poor care of the car. But really, those apply when selling a purchased car anyway — nobody wants a high-mile junker.
Taking Advantage of the Economy
So how do the downsides of leasing affect you today? As we're all aware, this is a uniquely unpredictable economy; nobody really knows how long the current crisis is going to last. Paul Raman, senior auto analyst for Zacks Investment Research, says, "Demand for autos is down 15 percent due to a weak economy and a weakening real-estate market. Demand is also hurt by weakening employment." That makes it tough to guess what a car will be worth two years down the road, and even dealers have been betting wrong.
That's why it just might be a better decision to lease instead of to buy. That's despite the current credit crunch, which, as Raman puts it, "is crippling to auto sales, and this has a trickle-down effect throughout the industry."
So how is it possible that leasing might be a better option than buying?
No sales tax: For starters, when you buy that $50,000 car, you'll pay sales tax on the entire amount, which can be as much as 10 percent or higher. So in reality, you're paying something like $55,000 or more. What's that? You don't have $55 grand in the briefcase? Let's add in the 7 percent or so financing charge you'll need to pay for say, five years. Poof! You're financing $65,343, which is about $1,089 per month.
Opportunity cost: Yes, you read that right. Since you're financing only a portion of the car's value when leasing, your monthly payments are much lower. And in many cases, your money factor (interest rate) is likely incentivized, which means substantially lower than 7 percent. The bottom line? You're spending a lot less than a grand a month — probably about half as much. So there's $500 a month on which you could be earning interest. If you can earn 7 percent compounding annually for two years, you've just found around $13,800 to stack against that lease payment.
Maintenance: Your new car isn't likely to require many unexpected repairs whether you lease or buy, but it's going to need an oil change or three, and we're counting pennies here. You can count on spending $100 on each oil change — and they're typically included with a lease.
An unpredictable economy: You might want to sell that $50,000 car in two years and find that there's no market for it, which, as we've recently seen, is entirely possible. If this is the case, the price of leasing is easily less than that of buying, simply because at the end of two years, the dealer takes your car back, and you brush your hands off and walk away. And suppose the economy turns around and the car is worth more than you expected? Great news for you, because the dealer has already agreed on the residual value of the car. If you think you can get more for it in the private market, just buy it for the price you negotiated two years ago and sell it yourself.
Here's the Best Part
So let's say you decide to lease your next car. You've got one more trick up your sleeve in 2009, and it's a big one. Despite the fact that just a couple of years ago the lease deals being offered were some of the best in recent history, the economy is now worse, and people are finding themselves in increasingly tough financial situations.
Enter sites like leasetrader.com and swapalease.com. As their names suggest, these are places that offer the original lessee the chance to dump a car quickly and get out of contractual obligations. Taking over someone else's lease not only locks you into the great deals of yesteryear, but also allows you to escape the fees and finance charges with which the original lessee was hit.
You'll pay a relatively small transfer fee (usually between $200 and $500) to the leasing company when you pick up someone else's lease, but in many cases that's negated by a cash bonus that the original leaser provides you to take the car off their hands (dubbed an incentive on the sites). Unlike taking out a lease from a dealer, you're not putting any money down, either.
Despite a crushed economy, the better deals on lease-swapping sites don't last long. After a quick look, we were able to find a 2007 BMW 328i with heated seats, rain-sensing wipers, dynamic cruise control, an iPod hookup, premium stereo and Bluetooth for $270 a month with a $500 transfer fee. Nineteen months remained, at 500 miles a month. Or if you're looking for something a little sportier, try a 2008 Mercedes SLK convertible for $346 per month with a $595 transfer fee and an 800 mile/month allowance. The point? The deals are still out there, but act fast.
James Tate cut his teeth in the business as a race team crew member before moving to the editorial side as Senior Editor of Sport Compact Car, and his work has appeared in Popular Mechanics, Automobile, Motor Trendand European Car. When not writing, Tate is usually fantasizing about a vintage Porsche 911.
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Leasing... If your a banker or Oil exec sure. Who else handles those $100 oil changes. No problem, more checking or credit card fees or maybe a peeny or 2 for that gallon of gas.
One serious point for leasing though are those who want/need the high reliability of a new car no more than 3-4 years old. Though reliabilty has increased for all makes. A lease also gives an easy out for the truely pessimistic as well.