Auto Makers Set Sights on Lease-Savvy Consumers

In what appears to be the latest--and possibly most attractive--twist in the auto sales game, a handful of car companies are making an effort to educate consumers about the fastest-growing and least-understood segment of the market--leasing.

Ford Motor Co. and Mercedes-Benz are among those that have revamped lease contracts to highlight key elements of the deal. Leasing industry trade groups are running public service advertisements to help consumers ask the right questions. And dealerships are hiring leasing experts to explain the process to salespeople, with the hope they”ll do a better job explaining it to customers.

“An informed consumer is our best consumer,” said Cedric A. Rashad, an Atlanta-based auto leasing expert, to a packed conference of consumer and automotive writers sponsored by Mercedes-Benz this month. “You need to tell your readers that there’s more to a lease than the monthly payment.”

The effort to clear up the confusion is widely applauded, although industry experts note the companies are inspired by a sense of pragmatism rather than altruism.

Leasing is designed to encourage repeat business: The average car buyer keeps the same vehicle for about seven years, but the average lease runs just three years. That means the consumer who leases will hit a new car dealership at least twice as often as the average buyer.

But customers return to a dealership only when satisfied with the car and the deal they made, says Rashad. The problem is, most customers can’t tell whether they’ve made a killing or gotten killed when they lease.

“If a customer is going to be happy, they have to feel as if they’ve made an informed decision,” says Donna Boland, a spokeswoman for Mercedes-Benz. “We’ve found that because they don’t fully understand the process, leasing poses the most discomfort for buyers.”

Mercedes is trying to counter that by sponsoring leasing conferences in major cities. Their goal: To dispel leasing’s “top 10 myths.”

The myths: Leasing isn’t smart because you don’t build equity; it’s complicated and confusing; it’s not for high-mileage drivers; it doesn’t allow flexibility; it’s only for new cars; it doesn’t pose tax advantages; it’s not for personal-use vehicles; it’s only for men; there are too many surprises at the end of a lease; leasing is just a fad.

The statistics debunk some of those myths. Leasing volume has tripled over the past decade. More than one in three new cars sold today is leased, according to CNW Marketing/Research, a Bandon, Ore.-based company. And women, who accounted for only 8% of the cars leased in 1990, now make up about 45% of lessees, according to Mercedes-Benz.

And Rashad quickly dispatches questions about building equity in a car.

“If you knew your house was going to decline in value, would you buy or rent?” he asks rhetorically. “I can’t tell you what real estate prices are going to do, but I can tell you with certainty that a new car is going to depreciate.”

However, in his attempt to address concerns about flexibility, tax advantages and end-of-lease surprises, Rashad lends proof to the “myth” that leasing is complicated and confusing.

Here is a brief primer for those who are interested in trying it:

The most basic--and obvious--difference between a car purchase and a lease boils down to the fact that when you lease, you aren’t buying the car. You’re essentially renting it for a long time.

Under a lease, your cost is based on the price of the car minus its value when you give it back. For example, if you’re leasing a $20,000 car that’s likely to be worth $14,000 at the end of a two-year lease, you’ll pay $6,000 for the lease. Unless you pay that up front, you’ll also pay a financing cost.

The terms of the lease will spell out what you can and can’t do with the vehicle--and what happens if you break the rules.

In addition, the contract will note:

* how many months you’ll have the car;

* what happens if you want to get out of your lease early;

* what happens if you return the car damaged;

* how much you’d have to pay if you decided to buy the car at the end of the lease term.

You’ll get a mileage allowance, which is a set number of miles that you can drive over the term of the lease without incurring additional charges. If you drive more miles, you will be charged a per-mile rate--just as you would with a rental car.

What if you don’t like the terms of the contract? Negotiate, says Rashad.

If you want a lower finance rate, you can usually secure one by agreeing to put down a substantial, up-front deposit. The deposit is refundable--assuming you keep your end of the bargain, lease to the end of the term and return the car in good condition, says Rashad.

The term--or number of months on the lease--also is negotiable. But beware. Make sure you want the car for as long as you’ve agreed to lease it. It is almost impossible to get out of a lease contract early without taking a financial beating.

How do you know how much you ought to pay for lease financing or for something like extra miles? To determine a reasonable interest rate, call your local bank and ask what it would charge you on an auto loan, then divide that by 24. The interest rate on an auto lease, known as the lease factor, is half of a monthly interest rate rather than the annualized interest rate you’re used to on, say, your credit card.

To determine the proper cost of the car, a reasonable residual value and cost for additional mileage, you need to spend a few hours in a public library pouring through Kelly Blue Books for new and used cars.

These books show the wholesale, retail and option prices for a vast array of foreign and domestic vehicles. And they indicate how much extra you ought to pay for a low-mileage car--and how much less you ought to pay for a high-mileage vehicle.

Savvy consumers who don’t mind doing a little homework can conceivably strike a better deal--and give themselves lots of flexibility--by leasing a car instead of buying one. The trick is to learn how to be savvy.

Kathy M. Kristof welcomes your comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or message kathy.kristof@latimes.com on the Internet.

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More Leases

(Please see newspaper for full chart information)

Leasing, once rare, now accounts for over a third of all new car sales. Percentage of leased new cars:

1995 34.7%

Source: CNW Marketing/Research