Leasing an auto now pays off for 'average' drivers, too
Should you lease your next car instead of buying? Maybe. This year, more than a million people will lease a new car. By 1985, it is forecast, about half of the automobiles being driven will be long-term rentals.
Most of the increase is expected to be from middle-class individuals and families who previously thought of it almost entirely as a status symbol for corporate executives and other professionals.
But no longer is this true. Large numbers of so-called "average" drivers also can benefit from leasing as well.
The primary benefits of leasing rather than buying a new car are obvious: There is no large cash outlay for a down payment; monthly payments are lower than for a financial purchase; and there's no reduction to your line of credit. The general principles of leasing are generally known to everyone.
The auto leasing company buys the car, estimates the depreciation, tacks on its profit, and parcels the sum into monthly payments. There are several financial pitfalls and misconceptions, however, that can make it more expensive than it should be.
Auto leasing started when corporations discovered that they could avoid buying a fleet of cars to use, which limited their bank credit or working capital. Instead, they rented a fleet of vehicles for several years and paid by the month. The companies could deduct the entire payment as a monthly expense.
In addition, there was a sales-tax savings. The company would pay a tax on the monthly lease payments as they occurred but not on the entire price of the car. Financial managers loved it, and it started a stylish trend that seemed to indicate success.
There are two basic types of lease: closed-end and open-end contracts.
Under both types a depreciated value is established for the car.
* With the open-end lease -- the one that is used most of the time -- the lessee shares in the accuracy of this projection. If the car's worth is less than the established figure, the lessee must make up the difference.
* Under the closed-end contract, the lessee pays a slightly higher amount and doesn't have to worry about the final value of the car when he turns it in.
Economically speaking, leasing can be financially rewarding only if the auto lessor estimates the depreciation to a point lower than it actually turns out to be. If you have an open-end lease and the car is worth more than the predicted figure, you receive the extra amount that the car is worth.
In times of higher-than-expected inflation, or when a car does not show the anticipated wear, this could indeed happen. however, the leasing company's estimates are based on the best available information, and it is not likely that it will make a large mistake in this area.
An open-end contract may be a useful tool if you are trying to obtain the lowest monthly rate on a particular car. At times a leasing company may opt to defer its return during the contract period. By lowering its cash flow, the company reduces the monthly rate you pay. The company regains the difference between the unpaid balance and the market value when the lease expires.
It should be understood that, even though your monthly rates are lower with this type of lease, you probably will "pay the piper" at the end of the lease period.
The best way to lease for less is to select a car that depreciates the least and then shop around for the best deal. Since you pay for depreciation, this is the most important thing you can do to keep your monthly payments low.
The leasing company can be a big help in this area. Since it doesn't represent a particular manufacturer, it is in its best interest (especially in a closed-end agreement) to select an auto that is suited to what you want and to estimate depreciation accurately.
It is important, however, to compare leasing company rates. Estimates of the residual value are derived in various ways by leasing companies. Some use rates published in national guides for this purpose. Others gather information on car values themselves and use computers to generate the data required.
Since the amount of the estimated depreciation directly affects the monthly bill, it pays to shop around.
Check out the larger leasing companies. They often have a built-in economic edge over their smaller counterparts.
Large leasing corporations may also be able to get lower financing rates to purchase their cars. Therefore, these companies may pass on the savings to their customers.
Maintenance is not an inherent part of a lease, but it may be available. The dealer will take care of servicing and even major repairs after the warranty expires.
The fact remains that you have no equity after your lease arrangements runs out. In a closed-end lease, especially, you simply walk away from the car at the end of the lease and that's that.
Still, if you decide to lease instead of buy, shop around for the best deal. It can make a dramatic difference.