Leasing often gets a bad rap. And no wonder: Its confusing terms
sound like fodder for a course in high finance, and dealers have
been known to slip bad deals past confused car buyers who simply
wanted low monthly payments.
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About 20% of new-car transactions are leases, but I'm convinced
that more people should be leasing. As manufacturers figured out
that the cash rebates they offered were hurting resale values, and
as the credit spigot began to flow freely again, carmakers shifted
incentives from rebates to low-interest financing and leases. If
you know what you're looking for and negotiate smartly, you can
save money by leasing and disprove the five myths below.
1. Leasing is a bad deal
. In general, if you keep a car well past the day the loan is paid
off (or if you pay cash to begin with), you'll save money by
buying. But if you trade in your car before the loan is paid off,
the value of the trade-in is unlikely to cover the remaining
balance on the loan. And if you shop -- and negotiate -- as hard
for a lease deal as you would for a purchase, you can come out
ahead by leasing.
Say you negotiate to buy a 2012 Honda Accord EX V6 (sticker
price: $28,170) for the invoice price -- $25,838 -- with 10% down
and a five-year loan at 4.4%. But after three years you decide you
want a new car. If you trade in the Accord, you will likely get
about 50% of the sticker price, or $14,025 (the resale value after
three years, according to the Automotive Lease Guide). Then you'll
have to pay off the loan. Figure your total out-of-pocket cost will
But if you lease that new Accord for three years, your monthly
payments will be $290 (Honda has been offering subsidized leases on
the 2012 Accord). When you turn in the car at the end of the lease,
you'll just walk away (unless you go over your mileage allotment or
have unusual wear and tear). Total out-of-pocket cost: $10,150. In
this case, leasing would leave you $1,312 richer.
In most states, you pay taxes only on the actual lease payments,
so leasing can put you even further ahead (see number 3 below).
Plus, you typically don't have to bring cash to the table for a
2. It's nearly impossible to negotiate a good
. Almost every facet of a lease is negotiable. But first you need
to understand the jargon:
. In the leasing universe, this is the vehicle price. You should
haggle over this figure just as hard as you would haggle over the
price if you were buying.
The lower this number, the better (you have to multiply it by 2,400
to get an estimate of the interest rate). Dealers are sometimes
reluctant to reveal the money factor, so be persistent.
. This is the value of the car or truck at the end of the
An inflated residual value lowers your monthly payments, but it
can also handcuff you. A more realistic residual value will make it
easier to sell the lease, trade your vehicle in the middle of the
lease or buy the vehicle at the end of the lease, says Tarry
Shebesta, president of
Shop for your lease at the dealer, banks and credit unions,
focusing on the money factor and the residual value. (No matter who
writes your lease, you'll have to haggle with the dealer over the
capitalized cost.) You can also go to LeaseCompare.com to
comparison shop and apply for a lease. Or check out
. For $350, the service will shop five dealers in your area.
3. Only businesses get a tax break
. Tax laws allow businesses to deduct monthly leasing payments as
But individuals get a tax break, too. In most states, you pay
sales tax only on the monthly payments, not the vehicle price. In
the Accord example above, you'd owe taxes on about $10,150 in
payments rather than the $25,838 vehicle price. (Arkansas,
Illinois, Maryland, Oklahoma, Texas and Virginia charge sales tax
on the entire price.)
4. You will have to pay hefty fees when you turn in the
. The typical annual allotment of 10,000 to 15,000 miles is stingy,
and the 20- to 25-cents-per-mile penalty for exceeding the limit
seems daunting. But if you buy a car, you're also penalized for
higher-than-average mileage when you trade it in.
You may be able to negotiate a higher mileage limit in exchange
for a higher monthly payment and still save money.
5. If you want out early, you're stuck
. Several fee-based Web sites, including
, match people who want to get out of a lease early with those who
want to assume a short-term lease. At LeaseTrader.com, you pay a
fee of $90 to post your vehicle and $250 to complete the transfer
of the lease.
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