Five Top Car-leasing Myths
NEW YORK (MarketWatch) -- If you're shopping for a new car but want to avoid high monthly payments, consider the option of leasing.
Although often veiled in confusing language that dealers use to describe the terms and benefits of leases, negotiating smartly and dismissing some common assumptions can get you on the road without breaking the bank.
If you're torn between the benefits of buying versus leasing, consider the advice of automobile columnist Mark Solheim. In the February issue of Kiplinger's magazine, Solheim debunks the top five leasing myths.
Myth #1: Buying is cheaper than leasing
This is true only if you keep a car well past the day the loan is paid. If you trade it in beforehand, the value of the trade-in will almost always exceed the remaining balance on the loan. You can expect to pay 30% to 60% less for the same car at the same price if you lease it short-term.
Myth #2: It's impossible to negotiate a good deal
Leases are negotiable, but be sure to master the jargon so you can bargain with confidence. The vehicle price is called "capitalized cost" and you should haggle over this as hard as you would over the price if you were buying.
Another key term is the "money factor." When multiplied by 2,400, it gives you an estimate of the interest rate, so the lower, the better. Dealers are often reluctant to reveal this number, so be persistent. Finally, the "residual value" is the value of the car at the end of the lease. Generally, an inflated residual value means lower monthly payments, but watch out for clauses that tie such an arrangement to a longer lease duration.
Myth #3: Only businesses get a tax break
Tax laws allow businesses to deduct the monthly payments as an expense. But individuals get a tax break, too: They only have to pay sales tax on the monthly payments, not the sale price of the vehicle.
Myth #4: You may have to pay hefty fees when you turn in the car
The typical annual allotment of 10,000 to 12,000 miles is stingy, and the 18-to-21 cent-per-additional-mile may seem daunting. But it is no different than when you buy a car, in which case you're also penalized for higher mileage when you trade it in. You can negotiate a higher limit on miles in exchange for higher monthly payments and still save money.
Myth #5: If you want out early, you're stuck
Several Web sites match people who want to exit a lease early with consumers in search of a short-term lease. At LeaseTrader.com you can post your car for a fee of $80 and complete the transfer for $150. But be sure to read the fine print. For instance, not all car-finance companies will release the original leaseholder from liability.
Here's an example
What does all this boil down to? If you leased a new Chevrolet Malibu LTZ for three years, your monthly payments would be $489, compared to $546 if you bought it with a five-year-loan at 7.9%. But if you wanted a new car after three years, to match the residual value figured into a lease of that duration, you'd have to sell the Malibu on your own in addition to paying off the remainder of the loan. All in all, buying would leave you $1,600 poorer.
Still, you need to consider the possible downsides of leasing. If you plan on using your new car for longer than the lease term, for instance, leasing is the less economical option, since it would cost you more to keep renting it past its original lease expiration date.
Also, you would be wiser to buy instead of lease if you know you're going to use the car often to drive your children to and from school, transport heavy cargo such as home-improvement materials, or if you have a dog that rides with the rest of the family. Putting a lot of wear-and-tear on your car means additional penalties when the lease is up.
For comparison shopping and to apply for a lease, visit LeaseCompare.com or go to LeaseWire, a lease search tool at the nonproit consumer resource Checkbook.org.
By Marshall Loeb