Leasing a new car isn't as cheap as in good old days

Staying Ahead

February 22, 1999|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

HAVE YOU been leasing new cars instead of buying them, because leases are so cheap, cheap, cheap? So is nearly one-third of everyone else on wheels.

Leasing holds a 32 percent share of the personal new-cars market today, up from just 10 percent in 1990. Who can resist an ad that screams, "$199 a month"?

But the super-low-lease days are done, says Art Spinella, vice president of CNW Marketing/

Research in Bandon, Ore., which tracks car market data. The effective price of leasing a car is on the rise.

If you're not leasing, have you been buying late-model cars, which have also been cheap, cheap, cheap? Dealers are flush with cream-puff cars, coming off two-year leases. They've been a better deal than buying new.

But the used-car market is changing, too, Spinella says. The number of cars coming off two-year leases dropped 8 percent in 1998. In 2000, they're projected to have dropped 27 percent. Instead, dealers will be acquiring more 3- and 4-year-old cars.

These older cars will be cheaper, but they've also had more wear and tear. A new car might be a better value -- especially when dealers can offer buyers big discounts from the sticker price.

Leasing got its big push in the early 1990s. Manufacturers wanted to move more cars. They gave dealers cash incentives, so they could offer leases at a lower monthly cost.

Lucky for you, unlucky for the leasing business. Prices were cut so much that the industry suffered "multiple billions of dollars" in losses, says Richard Schliesmann, executive vice president of Wells Fargo Bank in San Francisco.

When you take a lease, your monthly payment is based primarily on the difference between the car's initial cost and its expected value when the lease is up. The lower the initial cost, or the higher the expected future value, the less you pay per month.

At the end of the leases written in the mid-1990s, however, used cars were worth less than the industry had predicted. The lessors had to sell the cars at a smaller profit, or a loss.

"Used-car prices started to level out two or three years ago, when new-car prices did," says Charlie Vogelheim, editor of the "Kelley Blue Book," which tracks car prices. "They're now down by 2 percent or 3 percent."

As a result, leasing terms have changed. The car price fixed in the lease is relatively higher than it used to be, and the lessor assumes that the car will be worth less when the lease is up. The big cash incentives for leasing have largely been taken away. Instead, more cash incentives are being offered to people who buy a car.

On average, dealers gave buyers a $3,500 discount from the sticker price last year, Spinella says, compared with a discount of just $1,800 in 1993.

If leasing is still your game, expect to pay more for a comparable car than you did three years ago. A $299-a-month deal in 1996 might be a $399 deal today, and the term of the lease might be longer. The monthly payment will be closer to the monthly cost of buying the car and financing it with a loan.

New rules on leasing disclosure took effect last year, which have reduced the incidence of deceptive sales. "Complaints are way down," says Randall McCathren, executive vice president of Bank Lease Consultants in Nashville, Tenn.

Dealers are required to give you a free copy of an explanatory booklet, "Keys to Vehicle Leasing." You also can download it from www.federalreserve.gov.

If you're coming off a lease and decide you want to buy that car, do some research. The purchase price in your contract will probably be too high. If the lessor won't come down, consider buying a comparable car somewhere else.

You can check car prices in the "Kelley Blue Book" ($9.95 at a bookstore, through 800-258-3266, or at www.kbb.com).

For prices as well as lists of current dealer incentives, for both leasing and buying, check www.edmunds.com.

In fact, check both sites. Their used-car price estimates don't necessarily agree.

"It's a good buyer's market these days, whether you're buying new or used," says Tom Kontos, director of market analysis at ADT Automotive in Nashville, a major used-car auction house. "There's more pressure pushing down on car prices than pushing up."

Pub Date: 2/22/99

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