Auto prices are up, but you should look before you lease

Autumn used to be an exciting time for the auto business, whether you were a seller or a buyer. New models were covered with tarps, hidden behind painted showroom windows, or secretly photographed by auto magazines. We all waited to see what Detroit would offer. Nowadays, we wait to see how big the price increases will be.

Another round of price hikes this fall has made some people wonder if they should consider something besides a new-car purchase. Perhaps roller skates, or maybe a 10-speed bike, or, more seriously, leasing.

Buying a 1986 model car will, on average, cost about 9 percent more than this year's models. That includes the end, as of Oct. 2, of 7.5 to 8.2 percent financing incentives and a boost in car prices. On some models, prices will leap $2,000.

Ford has raised its 1986 prices 2.9 percent but will offer some discounts on optional equipment.

General Motors' average sticker prices will go up 3 percent; at American Motors they're up an average 2.8 percent.

Foreign-car buyers won't be exempt from sticker shock, either. Toyota's '86 passenger car prices will go up 1.8 percent and Honda's will jump 4.3 percent.

A leasing decision may also look good when you consider that the average new-car loan with 20 percent down is 12.84 percent, according to the Bank Rate Monitor.

This is about five points higher than the incentive rates in effect until recently. To get an idea what this means, consider that a $12,000 car with an 8 percent interest rate paid off over four years would require monthly payments of $292.96. Raise the interest rate to 13 percent, and the payments go up to $321.93. (One automaker, General Motors, seems to have seen the effect this will have and is promoting an 8.8 percent interest rate incentive on some '86 models.)

All this may provide part of the reason for the growth of auto leasing. In 1982, about 1.5 million cars were leased, according to the Automotive Leasing Association. In the 1984 model year, about 3.1 million cars were leased. In both years, the numbers were about evenly divided between fleet and individual leases.

``There's a lot more individual leasing going on,'' says John Fitch, ALA executive director. ``Often, when consumers want to buy a car, they can't afford it. Either the down payment is too large or the monthly payments are too high.''

Mr. Fitch says there are some distinct advantages and disadvantages to leasing. On the positive side, you get an itemized account of operating expenses, useful if there is any business use; you don't have to bargain over price, options, or trade-in with a new-car dealer; you don't worry about insuring or selling a leased car, though you do pay for both of these in the long run; and you don't need a big -- or any -- down payment.

In the negative column, if you don't use the car for business, you won't have the income tax deductions available on auto loan interest; you can't sell the car and get money to use toward the next one; there can be restrictions on service that keep you tied to one dealer; and if you move out of the area, you may not be able to take the car with you. To move might mean leaving the car, breaking the lease and incurring extra expenses.

The basic lease agreement is the ``closed end'' version. Here, there is a clear statement of the number of months (usually 12 to 36) the contract runs. At the end of the contract, you just turn the car in and walk away. As long as you've made all the payments, that's all there is.

In an ``open end'' lease, the monthly payments are usually lower, but you'll have to make a fairly big lump-sum payment when you turn in the car. This payment is supposed to compensate the lessor (the leasing equivalent of the landlord) for any loss sustained when the car is sold on the used-car market.

In all leasing agreements, there is a depreciation charge. This is at the beginning and is based on the car's estimated worth at the end of the contract. It is based on several factors, including the type of car, the expected use, and the state of the used-car market. If the depreciation is less and you have an open-end lease, you may get some money back. More likely, you'll have to shell out.

In general, says the Council of Better Business Bureaus (BBB), unless you use the car at least half the time for business, leasing will be more expensive than buying, primarily because of the lack of tax deductions and not being able to sell the car yourself.

``Leasing is always more expensive than buying,'' states Paul Allmacher, vice-president of national account sales and service at McCullogh Leasing Inc., of Roseville, Mich. ``If you can't deduct the lease payments on your income tax, you'll come out behind.''

The ALA figures a compact car leased on an open-end, no-maintenance contract (driver pays for repairs) and driven 15,000 miles a year would cost about $5,500 a year, some $1,400 more than the cost of owning. This is despite ads touting lease payments that could be $50 to $75 a month lower than loan payments.

Some of those ads, says Sarah Woodward of the BBB, have been a problem. ``A number of local BBBs are concerned that these ads don't make it clear that the price they're talking about is for a lease, not a purchase.'' This can be a problem when a well-known auto dealer also has a leasing operation and the customer sees only the dealer's name, the type of car, and the low monthly payment figure in big type.

Before signing any leasing contract, compare prices, depreciation, and insurance and maintenance costs. Make sure you get a written statement of all the costs, including security deposits, monthly payments, license fees, and taxes. Also, ask about penalties for late payments and what rights you have, if any, to cancel the lease.

If you have a question that would make a good subject for this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115.