Pros, cons of vehicle leasing can drive an emotional debate

Your Money

April 22, 2007|By Gregory Karp | Gregory Karp,Morning Call

In polite company, you shouldn't talk about politics, religion or car leasing.

That's right. Car leasing elicits emotionally charged and know-it-all arguments from both sides, pro and con.

Heated arguments probably arise because leasing involves topics that can be emotional - your money, how smart you think you are, and your car, which for some people is a measure of their self-worth.

A leased car is essentially a long-term rental car. It's paying for part of a car rather than the whole thing.

Vehicle leasing, which grew 21 percent in 2006, according to, is a complicated transaction. So advocates come armed with arguments about residual values, money factors and tax reasons for leasing.

They're pitted against the people who don't understand the point of leasing and simply look at the dollars and cents over the long term.

"This is one of those things that people debate, and there doesn't seem to be a consensus," said Philip Reed, an editor of and author of Strategies for Smart Car Buyers. "It's as controversial as Red Sox versus Yankees."

Who's right about whether leasing is good or evil? The answer is that "it depends." Mostly, it depends on how long you're willing to drive a car.

If you have a lot of money, you enjoy new cars and your financial responsibilities are taken care of, leasing might be for you. For everyone else, it might not be a good idea.

Instead of joining the debate about buying versus leasing - it's discussed ad nauseam at many quality Web sites and in many personal finance books - we offer a list of things you might not know about leasing a vehicle:

You can't compare leasing and buying. Leasing allows you to get a fancier car for a lower initial monthly payment. But leasing also provides practical advantages, such as upgrading continually to the latest auto technology and safety features, not to mention always having a car that's in warranty and rarely needs even routine repairs.

Serial leasing of new cars is more expensive than buying and keeping one for a decade. But after just a few years, it's an apples-to-oranges comparison -comparing a leased 2007 Acura TL to a purchased 2002 model, for example, is comparing two very different vehicles. "So, it will cost you more money, but you get more," Reed said.

Whether those leasing advantages are worth paying for is where the debate lies.

You can't always get the advertised payment. "They almost always base the lease payment on cars that are hard to find on the lot, stripped-down cars," Reed said.

Mark Perleberg, lead auto expert with, the consumer Web site of the National Automobile Dealers Association, said, "It's a marketing strategy.

"The manufacturer will always advertise the cheapest possible payment. Is it the model you want? In many cases not. People will always want more options," he said.

"They're seldom going to advertise the most expensive product out there," he added. "It's not necessarily a dealer or manufacturer trick. It's just the way things are marketed."

Ads don't always include tax, tags and title, which could add 10 percent to the cost, Reed said. And the special-lease offers usually require upfront money, called drive-off fees.

In March, the average lease payment was about $460 over 37 months on a car price of about $31,400, according to The average mileage cap was 12,800 a year.

Leasing is complicated. Leasing is full of jargon, where the price becomes the "capitalized cost," the down payment is the "cap reduction" and the interest rate is a "money factor" expressed as a weirdly small decimal such as 0.0023. To convert the money factor to a percentage, multiply by 2,400.

Comparison shopping pays. Although you can haggle for better lease terms, your best bet is to seek bids from several dealers on the same lease package, which would include the exact make and model of car, options, drive-off fees and annual mileage cap. Reed said lease contracts are so complicated that most car buyers simply aren't knowledgeable enough to negotiate individual terms.

Big down payments can be risky. When buying houses and cars, using a big down payment is generally a good idea. But with leasing, big down payments, which simply pre-pay some of your monthly payments, can add risk.

If your car is totaled or stolen, the insurance company will pay off the remainder of your lease, but the financing company keeps the down payment. Then you're out of a car and the down payment. "It's better to make a lower down payment, or none," Reed said.

Three-year leases are best. Most vehicles are under warranty for the first three years. After year No. 3, cars begin to show their age, needing new tires and expensive maintenance. Part of the reason for leasing is to avoid these hassles.

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