Leasing a car may only look cheaper

Herb Weisbaum • Profile • E-mail

My brother and I think alike about most financial matters. But when it comes to cars, we take very different roads. I always buy. Stan always leases.

He likes the lower monthly payments and wants to drive a new car every three years. I keep my cars 10 to 12 years. I get years of transportation with no car payments and own something of value, a trade-in, when I’m ready to get a new car.

For me, the lease transaction is way too complicated. I also dislike the idea of back-end fees if I drive too many miles or have what the dealer considers to be excess wear and tear.

Like my brother, a lot of people find leasing very attractive. Over the last few years, leasing has made a big comeback. According to Edmunds.com about 18 percent of all cars will leave the lot on a lease this year.

With money tight, leasing looks very attractive right now. Those lower monthly payments make it possible for some people to drive a more expensive model than they could afford to buy. By leasing they usually pay more in the long run, but they may not know it.

The editors of Consumer Reports Money Advisor did the math and concluded that leasing “is almost always less economical than financing the same vehicle.”

Lease vs. Buy Consumer Reports Money Advisor compared buying and leasing a $30,000 Subaru Outback. In both scenarios there was no down payment. Assuming a 5.7 percent interest rate, the total lease payments would come to $18,848, not counting sales tax. The loan payments would be much higher, $32,709. But after you subtract the remaining $15,000 value of the car, which you’d own at the end, your net cost drops to $17,709, or $1,139 less than with the lease.  What accounts for the difference? The finance charges: $3,848 vs. $2,709 for the loan. The gap widens further once you factor in any lease-related fees (such as the “administrative” or “acquisition” fee which typically runs several hundred dollars) and penalties, such as those for excess vehicle wear and tear or for going over your mileage allotment. Source: Consumer Reports Money Advisor

Remember, with a lease you’re just renting that vehicle for a set amount of time. When you buy, it’s yours once you make the last payment. “You have an asset that has some real value,” says Robert Krughoff, president of Checkbook magazine. “Yes, you do pay more per month to end up with that value, but at the back end you really do have something.”

The language
Leasing has its own language, terminology that can be confusing because it’s unfamiliar. With a lease the price of the vehicle is called the “capitalization cost” and the interest is referred to as the “money factor.”

When buying a car, you can compare loan rates with one simple number, the APR or annual percentage rate. With leasing there is no such number. “There is no way to tell if you are getting a good deal or a bad deal unless you use a spreadsheet,” says Seattle attorney Peter Maier, who specializes in cases dealing with auto problems.

Maier is not very keen on leasing. “Any time a transaction gets more complicated, the chances go up that you’ll get taken,” he says. “There are just umpteen subtle ways for a dealer to take advantage of you, or things you may not consider, when signing the lease.”

“Leasing is dangerous if you don’t know what you’re doing,” says Doug Walsh, who runs the consumer protection division of the Washington State attorney general’s office. Walsh has been dealing with car issues since 1990, so he knows all the tricks of the trade.

Most people are not familiar with leasing, he says. They don’t realize that the disclosures are different and the way the transaction is negotiated is different. Most people focus on the monthly payment, rather than negotiating the best price. Do that, Walsh says, and you’ll be giving the dealership “a ton of profit and not even know it.”

MORE FROM CONSUMERMAN

ConsumerMan Section Front

ConsumerMan: Capricious credit card rates ConsumerMan: Buying organics on a budget ConsumerMan: Crash tests still need work ConsumerMan: Get a cheap cell headset ConsumerMan: Don't gab and drive ConsumerMan: Digital converter offer a scam ConsumerMan Section Front   Add ConsumerMan headlines to your news reader: