Driver's education

Lease offers are back in the spotlight, but are they right for you?

Your Money

March 07, 2004|By Rick Popely

Zero-percent financing and megabucks rebates pushed auto leasing into the background the past few years, but intriguing lease offers are popping up again.

"There are some pretty good deals out there now," said Art Spinella, president of CNW Marketing Research in Bandon, Ore., which tracks industry trends. "A lot of the deals have minimal or zero down payment."

Leasing was the rage in the late 1990s, when automakers promoted deals that sounded too good to be true, such as $299 per month for a $30,000 car with only $500 down.

Turns out many were too good to be true -- for the carmakers. Lease payments are based largely on the residual (or resale) value of a vehicle -- what it will be worth at the end of the lease -- vs. the original price (or capitalized cost). Automakers and leasing companies used wildly optimistic residual values and lost billions of dollars when the vehicles fetched far less on the used-car market.

After they switched to more realistic residuals, monthly payments shot up and leasing fell to 22 percent of new-vehicle sales last year from a peak of 32.2 percent in 1999.

Spinella sees leasing regaining popularity. Car companies like it because it brings customers back into their showrooms sooner and gives dealers a steady supply of late-model used cars.

Slapping a $3,000 cash rebate on the windshield makes a vehicle look like distressed merchandise. Slipping the same amount into a lease deal to reduce the monthly payment "doesn't hurt the image as much," Spinella said.

"Many car companies are taking the money for a rebate and using it to reduce the capitalized cost of the lease," he said.

Whether leasing is cheaper than buying varies by vehicle and consumer, even with enticing deals.

Among online sites that provide information and calculators to compare the costs of leasing and buying are www.bankrate.com, www.cars. com (which is affiliated with Tribune Co.) and www.acvl.com, the Web site of the Association of Consumer Vehicle Lessors.

The best advice: Talk to a tax adviser or financial planner after crunching the numbers to find the best fit.

Rick Popely is a transportation writer for the Chicago Tribune, a Tribune Publishing newspaper.

PLUSES & MINUSES

Leasing has advantages ...

(PLUSES)

+ Most leases require a smaller down payment and lower monthly payments than a loan on a comparably priced vehicle.

+ You're not making an eternal commitment to a particular car. A typical lease runs three or four years, and at the end the consumer has two choices: Buy a car or lease again.

+ The vehicle will almost certainly be under warranty for the life of the lease, so there should be no major repair expenses such as a new transmission.

+ You'll bear no financial risk for the residual value, which is carved in stone in the lease contract. If the price of gas doubles over the next three years, a leased Goliath XL 500 sport utility vehicle that gets 11 miles per gallon may be worth only its weight in scrap metal. The leasing company owns it and absorbs the loss of resale value instead of the user.

... but clauses could cost you

(MINUSES)

- Leases traditionally allowed 12,000 miles per year, but in recent years several manufacturers have lowered the mileage limit to 10,000, with a typical penalty of 15 cents per mile over the limit. Higher mileage limits can be negotiated for a smaller incremental fee at the start of the lease.

- Motorists who smoke, eat or drink in their vehicles or treat them as mobile motel rooms are likely candidates for "excess wear and tear" charges when the leasing company assesses damage at the end.

- Leasing can be costly for those who park by ear, waiting to hear contact with a solid object. Dings, scratches, dents and even having one tire that doesn't match the others may be tacked on to end-of-lease charges, which can amount to hundreds of dollars.

- When the consumer pays off a car loan, she becomes an owner and kisses the payment book goodbye. At the end of a lease there is no equity, so the consumer has to pay all the upfront costs of another lease or purchase.

Whatever your decision, fill the 'gap' with insurance

Before you drive your new car off the lot, look into the gap.

"Gap insurance" covers the difference between what you owe on your car and how much your insurance company claims it is worth. Say you bought and financed a $25,000 car, but it was stolen or totaled within a week. Your insurance company says it's worth $19,000, which means you still owe the bank $6,000 for something you can't drive.

"Auto insurers are not insuring your loan," said Tony Wanderon, president of First Colonial Insurance Co. in Jacksonville, Fla. "They are insuring the value of your car."

Most lease terms should include gap insurance, but it's worth giving your contract a closer look. Car buyers can build the cost of gap insurance into their monthly payments or get their own policy. The cost is typically $400 to $500 for the life of the loan.

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