1. Archive

Lease making sense for more drivers

Should you lease your new car or buy it?

The pendulum has been swinging toward lease arrangements, say the experts, for a bunch of reasons:

Consumers' disposable income has been shrinking, and there's more competition for the dollars people have.

Automobile prices have been going up. The average price of a car last year was $18,200 vs. $10,725 a decade ago, says Tom Webb, chief economist for the National Automobile Dealers Association.

There's no more tax write-off on the interest charges when you finance a car.

Today about 27 percent of new car transactions are leases instead of purchases, up from 17 percent back in 1984. The ratio could jump higher after the new models come out. Reason: Pent-up demand. The average age of vehicles now on the road is eight years.

What to watch when you lease:

Look at how much is required for a down payment. Typically this should be no more than the first month's payment and a security deposit equal to the first payment.

Don't sign a lease for any longer than you want to keep the vehicle, or else you'll wind up paying an early termination charge, which is typically greater at the beginning than at the end. Why? The automobile will depreciate faster than the payments can recover.

Always find out what the early termination charge is.

It should be no more than the "level yield method," which is the fairest to the consumer. In plain talk it means that the lessor recovers charges for services and depreciation _ no more.

Put mile limitations on your lease. Figure out how many miles a year you'll use the car for work, and tack on about 5,000 miles or so for personal use. It all depends on your driving habits, but you're better off being honest with the leasing company upfront. Your lease can be structured to accommodate those extra miles. Later, when the lessor charges you for them, your cost will typically be less than if you pay for the miles all at once.

If ownership is your bag and you want to keep a vehicle for, say, seven to 10 years, then by all means buy the set of wheels instead. Just make sure you compare one cost against the other. Figure out your obligations in both instances, by taking the total of all payments for the lease, including any end-of-term options, and comparing it with the cost of financing the vehicle. That won't be 100 percent accurate, but it's enough for a ballpark judgment.

The biggest bear trap you need to concern yourself with in leasing is the residual value of the car. Usually this is set by the dealer, and if you're not careful you could get caught by a too-high figure.

Most contracts state that the owner has the right to sell the car at wholesale value and hold the lessor responsible for the balance due (i.e., remaining payments plus the residual value, minus what the car sells for at wholesale).

Say the vehicle's sales price is $20,000, and the dealer has estimated the residual value at $9,000 at the end of three years. He finances the other $11,000 for that long, at $355.95 per month.

At the end of the first year, you want out. You still owe 24 payments totaling $8,543, and a residual of $9,000, plus an early termination charge of perhaps $250 to $500. The total due is $18,000, but the car's wholesale value may be only $14,000 or less. You wind up owing $4,000.

Latest rate trend: CD yields rose by a few hundredths of a percent, as the ratio of increases to decreases narrowed to 12-to-1 from 45-to-1. Mortgage rates fell by one-tenth of a percent.

Robert K. Heady publishes Bank Rate Monitor, 100 Highest Yields and other financial newsletters from his office in North Palm Beach.