Sunday, December 10, 2017
Business

Auto leases entice, but they're still costly

When you can drive a car off the lot with that new car smell for a mere $199 a month lease, many consumers can't help asking: How can I afford not to take this deal?

Indeed, the pay-as-you-go smartphone mentality seems to have seeped into the car market, especially with younger buyers, many of whom don't seem to mind that they don't own anything at the end of the lease's term. But that hasn't changed the long-term economics of leasing: it still costs several thousand dollars more than buying a new car, not to mention a newish used car.

"People's attitudes are shifting," said Philip Reed, senior consumer advice editor at Edmunds.com. "The car is being seen more as a commodity to be used and then returned.

Still, the financial consequences are worth re-examining.

Reed looked at three ways you could acquire a four-door Honda Accord EX: buying a new 2014 model, leasing the same 2014 car, or buying a used 2011 Accord with 36,000 miles. (Many people in the New York area are paying about $28,211 for the new car, including tax, title and registration.)

The analysis looked at the cost over six years, because the average person owns a car for that long, and it incorporated typical buying patterns: the new Accord is purchased with a five-year loan, the used car is financed with a four-year loan, and the person who is leasing must take out two consecutive 36-month leases.

Bottom line: Leasing costs $5,756 more than buying a new car and $10,277 more than buying used. (Buying new costs $4,521 more than buying used.)

With that analysis in mind, here are some other factors to consider:

NEEDS VERSUS WANTS: Is there anything you absolutely need now that you can't get in a lightly used car that's only a few years old? Some experts say you can make a decent argument for new cars based on some recent safety improvements. The Insurance Institute for Highway Safety added new recommendations after its latest small frontal crash tests last summer. And some manufacturers have been updating their existing models to meet those standards, said Jeff Bartlett, deputy automotive editor at Consumer Reports.

Though it's hard to argue that anyone "needs" to have the latest technology, that has come a long way in the last couple of years, too. "That two- to three-year time difference means the world in terms of connectivity," Bartlett added. "Now, there are stereos in mainstream cars that offer Pandora, Aha, and Stitcher for streaming Internet radio via a smartphone and allow you to control an iPod."

LEASING: It becomes a difficult cycle to escape. Unless you saved extra money while leasing, you may not have accumulated enough for a down payment on your next car, and you won't have a car to trade in. And now that you're accustomed to the low monthly payment, it will be hard to stomach the much higher monthly cost of buying new.

You will avoid repair or maintenance costs (except for oil changes and tire rotation) that used and even new car buyers would eventually have to pay. But you will probably pay more for insurance with a leased vehicle, which Reed says is almost as much as the extra maintenance. It ends up being close to a wash.

Leasing also allows you to get into a car right away, with little financial disruption: It requires little or no money down and minimal outlay each month. There's also the fact that you're driving a brand-new car, with all of the latest technological and safety features.

TIME HORIZON: "If you are someone who knows they are going to own a car for 10 years and you are driving all over the country, you are not the type of person who should be leasing," said Alec Gutierrez, a senior market analyst at Kelley Blue Book, referring to the mileage limits of about 12,000 a year on leased vehicles. "If you go beyond that, you are likely to be hit with significant penalties."

Besides, buying a new car and holding onto it is more economical now. "You are making pretty high payments for about four or five years, but the dependability of cars is really great these days," said Reed. "It can probably go another five years with minimal costs."

LEASE MECHANICS: You're essentially paying for the amount of value the car loses over the course of your lease; in other words, the price you pay is based on the vehicle's residual value at the end of the term.

That's why cars that retain their value tend to translate into better deals for leasing: the higher the residual value, the lower the monthly payment. "Things like Mercedes, BMW and Honda hold their value very well, and make very good lease cars," Reed said.

BUYING USED: If you buy used, you may need to come up with a larger down payment than if you bought new.

PAYING CASH: That's what Bartlett of Consumer Reports does, whether he is buying new or used.

"Obviously, nobody does this," he said. But when you pay cash, "you don't have to worry about them sneaking in all of these fees. You just negotiate a price, and then write a check for that number."

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