CONSUMERS : Leasing an Auto Can Mean Lower Monthly Payment
Still drooling over that $30,000 shiny red convertible with the soft leather seats you saw at a dealer recently? Figure you’d have to win the Lotto to buy it? Maybe not, if you have a good credit rating and want to consider leasing it.
As new-car prices keep escalating and write-offs of consumer loan interest decline dramatically--10% this year; 0% beginning in 1991--more and more consumers will face a complicated choice: to buy or lease an automobile.
That $30,000 convertible, for example, could cost 10% down, or $3,000, and roughly $450 a month to buy. But it could be leased for about $350--$100 a month less.
Previously, car leasing was confined largely to fleets for companies and to the self-employed, who could write off leasing costs as a business expense.
But IRS rules on that have changed, too. Now there may be no real tax advantage on those car-related business expenses.
That’s because the federal government has changed the auto depreciation deductions it allows. And it no longer lets business people take big, deep automatic deductions for their cars; instead, they must prove that they used the vehicle for a business purpose before they can deduct that expense.
Still, car leasing nationwide is on the rise; an estimated 1.2 million more vehicles were leased last year than in 1988, and many industry experts expect leasing to keep gaining annually.
“We expect it to grow one-half of a percentage point of the entire marketplace in passenger cars and light-duty trucks,” said Bill Nerenberg, executive director of the National Vehicle Leasing Assn., based in Los Angeles.
Much of the increased activity is due, Nerenberg said, to high car prices and the fact that many people simply can’t ante up the hefty down payments required. But by leasing, they can drive away with little or no down and a lower monthly payment.
But the cheapest way to buy a car is still paying cash for it, observed Mickey Garrett of the Greater Los Angeles Motorcar Assn. “A lot of people, (however), can’t come up with that much cash or want to invest it elsewhere.”
That’s true for Harry Meyers of Granada Hills.
“I put nothing down, my monthly payment is low and it doesn’t tie up my capital,” he said, noting he has leased cars for his personal use and vans for his business, Ships Laundry of North America, from Executive Car Leasing for 17 years. “To buy a Cadillac, I would put $15,000 down, at least. I can use that money to make money and not have it tied up in a car.”
At General Motors Acceptance Corp. (GMAC), leasing volume--under a program called SmartLease instituted in October, 1988--increased in 1989 by more than 60%. About 10% of GMAC’s business now is leasing, a spokesman said. But a company officer “recently commented that he believes by the end of the century, at GMAC, we’ll be looking at leasing as 25% of our business.”
Motorists who do lease also probably will be finding themselves beneficiaries of some deals affecting parts and service.
Observed Mike Michaels, of Toyota: “All the companies have recently extended (manufacturers’) warranties, so there’s not much of a problem whether you lease or buy. Now the length of the warranty is equal to or exceeds the typical lease terms. (But) with most leases, the person is still responsible for routine maintenance.”
Consumers shopping for luxury models, however, will find many sweeping manufacturer guarantees on maintenance, whether they buy or lease. Audi, for example, offers a three-year, 50,000-mile warranty on scheduled maintenance. There are no deductibles, and Audi will replace wiper blades, bulbs and fuses and have the wheels balanced and aligned at no charge to the customer.
“It’s hard to give rules of thumb” on who buys and who leases, said Greg Ehlers, of Lou Ehlers Cadillac-Sterling in Los Angeles, which estimates its business to be 75% sales, 25% leasing. “Generally, the older, more conservative people always want to own. Other people don’t care whether they own or not.”
Although leasing generally costs less than owning, motorists probably would be better off buying a car if they intend to keep it more than six or seven years, said Mort Herbert, vice president of Executive Car Leasing, the largest leasing firm in California.
Contrary to popular opinion, says Bud Barish, of Barish Chrysler, consumers don’t throw money away by leasing--not if the sums they spend over a normal 4- to 5-year lease can be applied toward buying the car when the agreement runs out.
Barish said his leases are written with purchase options and predetermined prices.
“If the value of the car at the end of the lease is $10,000, but it is actually worth only $8,000, then turn in the car and you owe nothing. The residual value (the auto’s worth at term’s end) was miscalculated and you benefitted with a low lease rate.”
But if that same car was valued at $10,000 and it’s worth that figure at the end of the lease period, motorists can buy it or walk away, under Barish’s lease. And if that $10,000 car is worth more, say, $12,000, “you can buy the car worth $12,000 for only $10,000 or we will refund you $2,000 when you return the car.”
Consumers should use care and follow a few basic rules when leasing:
* Be sure to price-shop for financing. Prices can very from several hundred to several thousand dollars. Find the car you want, then check the terms offered by dealers, leasing firms and lenders.
* Don’t sign a lease contract until you know a car’s set price and its final estimated value. You can and should negotiate prices.
* Look for closed-end leases with end-of-term purchase options. They assure you that the car’s residual value will be the same on return as when leased. Open-ended leases often are cheaper but you can end up paying the difference between the estimated residual value and the car’s actual market value at lease end.
* Check out the annual mileage limits; try to stay under them. Most contracts call for 15,000 miles a year maximum; if you exceed that, you can be charged eight to 12 cents for every extra mile.
* Try to lease a car that will not depreciate rapidly. A Honda Accord, for example, holds value better than a Pontiac 6000, a Cadillac more than a Lincoln. Consider with care, too, the car’s color. Herbert, of Executive Car Leasing, said “even the color of the car can enter into the value. For sports cars, for example, white or red have the best value. With the same miles and the same care, green would bring $200 less, brown $100 less.”
* Don’t be fooled by advertisements offering ridiculously cheap leased cars, say $99-a-month deals. Most require hefty down payments, and “a large down payment is not a good deal for consumers,” said Nerenberg, of the vehicle leasing group.
* Watch out for contracts that require you to pay 1% to 2% in extra fees if you turn in your car before the lease expires or contracts that charge you extra each month if you move out of state.
* Remember, California sales taxes are paid over the life of the lease, rather than in a lump sum up front (as in a purchase).
