Should You Lease Your Vehicle?

Leasing a vehicle makes sense if you're disciplined enough to actually invest the cash that you would have used for a purchase. If you're a business owner, that cash can be invested in inventory, equipment or even mutual funds--as long as it's put toward something that will make positive difference in your bottom line.

Though it's better, however, to pay cash for something that depreciates, and finance those things that appreciate, like your home, each person has different needs and different amounts of cash available. It's not always affordable to finance a $25,000 vehicle or the down payment that goes with it. But it's safe to say that owning a vehicle is a wiser financial choice than leasing one. And paying cash is the best option yet.

As an example, Consumer Reports illustrates a lease based on a recent market price of $25,236 on a 1998 Ford Windstar at $387 per month. Assuming the money spent on lease payments could have earned a very modest 3 percent return if saved instead, that adds up to $15,469 over three years. The same vehicle with a lease based on the manufacturer's suggested retail price (MSRP), by comparison, would cost $542 a month, or a total of $21,281--a $5,812 difference.

Many dealers contend that smart customers lease their vehicles, which is tempting because incentives abound at any given time. Subvented leases are subsidized by the manufacturers, the leasing equivalent of a manufacturer's rebate. Consumer Reports calls them "blue-plate specials." If you're thinking about leasing, pay attention to what's being offered. Leasing vehicles also serves as an incentive to dealers because at the end of the lease customers will theoretically return to replace their vehicle.

Leasing's on the Upswing

While little or no down payments and lower monthly payments seem attractive, the decision to lease really depends upon the buyer's financial situation. Jim Patterson, fleet manager at Bill Branch Chevrolet, often bids on municipalities, who usually pay cash. He reports that about 40 percent of sales are lease transactions. The dealership sells about 100 trucks a month.

Like Patterson, Phil Clemente, general manager of Fort Myers Lincoln Mercury, says that of 200 new cars sold in one month, 96 units were leased. Popularity increases whenever manufacturers add those incentives. Clemente adds that leasing allows customers to drive a more expensive vehicle, a real attraction if your car is seen by customers, such as sales rep. More than half of the business vehicles sold by Fort Myers Lincoln Mercury are leased.

How it Works

There are three main components to leasing. The capitalized cost ("cap cost") is about the same as the purchase price of the vehicle but could include fees such as acquisition, security deposits, down payment or additional charges. The residual value on a lease is the estimate of what the vehicle will be worth at the end of the lease. Essentially, the higher the residual value the better because high estimates devalues the leasing company's profit, not the customer. The difference between the capitalized cost and the residual value is the projected depreciation. The last component is the interest or what it will cost you to borrow the money. This covers the cost of the leasing company to buy the car and can often be subsidized by the manufacturer to lower the customer's monthly payment. Typical leases can run from around 7 to 11 percent. Open-ended leases allow you to pay the difference between the estimated and actual residual value while a closed-ended lease means you don't.

The Federal Reserve Board, overseer of the nation's banking and credit industry, now requires dealers to provide a form that discloses basic details of the leasing contract. However, dealers are not required to do so until you are about to sign a contract. It's also required that leases use standard terminology. Advertised leases today make it clear to the consumer what the total amount due at signing is-traditionally a huge consumer problem. The Federal Consumer Leasing Act requires that delivery fees, all fees above and beyond normal wear and tear, and the residual value all be disclosed in easy-to-understand terms.

Getting out of a Lease

If you want to end your lease early, you'll probably have to pay the difference between the vehicle's estimated value and the total month payments you've made to that point. This amount often ends up being all of the remaining payments you'd owe through the end of the lease anyway.

Insurance and Mileage

Getting GAP insurance might save thousands in the event the car is totaled. It picks up the difference between what you owe on the lease and what the car is worth.

Since most dealers limit the mileage to 12,000 or 15,000 miles per year, check into buying more miles. Many people who are on the road a lot for their jobs will likely exceed the mileage restriction and could be charged as much as $.25 for each additional mile.

When it's Over

After two or three years of driving, it's more than likely that the vehicle will have nicks and scratches--maybe even more bruises than that. It's probably a good idea to get an estimate from an independent repair shop before returning the car to the dealer. This may avoid or lessen some unexpected lease-end charges. You'll also want your security deposit returned.

Since some businesses are inherently hard on their vehicles; it might make sense to pay cash and drive it till it dies. On the other hand, certain tax advantages might make leasing company vehicles a viable option. Be sure to check your accountant.

Both buyers and sellers can argue the merits of one over another. Leasing is just one option of financing a vehicle, and it's not always for everyone.

((((Sidebar))))

A Primer on Leasing

· Read the fine print

· Check the lease restrictions

· Check the coverage for repairs and damage

· Define normal "wear and tear"

· Make sure lease includes GAP insurance

· Know the car's residual value