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By Jane Bryant Quinn
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AUTOMAKERS THINK THEY'VE GOT A BRIGHT NEW IDEA to get you to turn in your car more often. They're offering some sensational wheels on short-term leases. If you'd get a new car every three years instead of every five, you'd give the whole industry a lift.
When I last looked at car leases, four years ago, they were cheaper per month than an auto loan but more expensive over the long run. In many cases, that's no longer true. Automakers are subsidizing their leases, so they're cheaper than loans and may even be cheaper than paying cash.
When you lease a car, your payments cover only that portion of its life that you'll actually use. Say, for example, that a Mazda listed at $19,945 is worth $8,260 after three years. The buyer pays a negotiated $18,800; three years later he applies the trade-in value to the price of the next car he buys. If you lease, however, you buy only the car's first three years of life. That final $8,260 isn't figured into the price, which reduces your monthly cost (chart).
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Many automakers sweeten the deal in two ways. First, they lower the lease's internal rate of interest, compared with the rate on an auto loan. So you're saving on the finance charge. Second, they guarantee a high value for the car when the lease is up. For the Mazda on the chart, the leasing company (the lessor) is assuming a future value of $10,370. But the actual value is projected at $8,260-so the lessor is preparing to swallow a 82,110 market loss. You (the lessee) wind up saving $1,248 over the cost of an auto loan.
The savings vary. Ford's best deals are on two-year leases; other automakers put more dollars into the three-year lease. Altogether, 24 percent of the new cars sold in the United States are likely to be leased this year, says Art Spinella, vice president of CNW Marketing/Research in Bandon, Ore. He expects that to rise to 40 percent in the year 1998.
Today's leases might be cheaper even for those who will keep their cars for many years. That's because of your choices at the end of the lease. Typically, the agreement allows you to turn in the car or to buy it at the guaranteed price. But you won't do either, if that Mazda is indeed worth $2,110 less than the lease contract says. Instead, you'll walk away unless you can buy at something close to the true wholesale price (check the published prices before making your offer). The lessor will certainly negotiate. You'll then own the car for a lower total cost than if you had bought for $18,800.
If you don't get a subsidized price, it might still be smarter to lease the car now and buy it later--provided that you use your monthly savings profitably. For example, you might pay off a high-rate credit-card debt to improve your finances overall.
What if you could buy for cash, without taking a loan? In this case, the economics of leasing depend on what you'd do with the money if you didn't spend it on a car. As a rule of thumb, leasing is better if your lump sum of cash would otherwise earn at least I percentage point less than the lease's internal financing rate, says Randall McCathren of Bank Lease Consultants in Nashville, Tenn. In the example above, where the financing rate is 5.55 percent, your cash would have to yield 4.55 percent or more. That internal rate (or "money factor") is not disclosed in the leasing agreement. The auto dealer knows it but may be reluctant to tell. More leasing tips:
Bargain down the price of the car, then ask for lease payments based on that price. You'll overpay if you ask just for the leasing price. "Consumers assume it's a good deal when it could be a better deal," says John Hammond of J.D. Power and Associates. Most leases don't disclose the true car price. That cover-up should end, McCathren says, if the Federal Reserve Board, as expected, begins a review of the current lease-disclosure rules.
Don't take a lease for a longer period than you expect to drive the car. if you quit the deal early, the car's trade-in value will be a lot lower than the sum you owe on the lease, and you'll have to make up the difference. In the past you also had to pay the difference if the car was stolen or wrecked. But mainstream contracts now insure you against this risk at no extra charge. Be sure you're covered.
Tell the dealer how many miles you're likely to drive. At the end of the lease, you'll pay 10 to 15 cents for each mile over 15,000 a year to cover the extra depreciation on higher-mileage cars. You'll pay less, however, if you buy extra miles in advance. Ford rebates any mileage you don't use. The turn-in value assumes that your car has been well maintained. You will have to pay extra for cracked glass, lost bald tires, tom seats, deep dents (look for an itemized fist in the lease). Note that this cost isn't unique to leases. When you own a car, excess damage reduces its trade-in value. A good dealer will inspect Your car a month before the lease is up and tell you what repairs will have to be made. Ask to be there when the final "condition report" is written. If the lessor won't allow it, take pictures of the car and lease your next one from someone else. The pictures may protect you if the lessor unscrupulously sends your old car to auction, then hits you with a big bill for wear and tear.
Beware of ads that promise champagne cars at peanut-butter prices. In the flyspeck footnotes, you'll learn that that lease requires a four-figure down payment. New York state Attorney General Robert Abrams has so far forced 11 auto-dealer and distributor groups to print the down payment in larger type.
Even cheaper than leasing is probably to buy late-model used cars, as rising numbers of Americans do. Today's short-term leases are manufacturing cars for this market--and eventually more of them will be leased, too. The next step for the industry is to define a new top-tier category of used cars, both luxury and everyday models. They'll be reconditioned cream puffs under new types of warranties and leasable to good credit risks on new-car terms.
Here's how it looks for a $19,945 Mazda 626LX, bargained down to $18,000 and including sales taxes, assuming you keep the car for three years.
3-YEAR LEASE 5-YEAR LOAN* PAID UP FRONT $683t $1,395 AMOUNT FINANCED $19,225** $18,533 MONTHLY PAYMENT $333 $376 TRADE-IN COST $0 $52 est. TOTAL COST $12,352 $13,580 FINANCING RATE 5.55% 8%
*CAR TRADED IN AFTER THREE YEARS. t SECURITY DEPOSIT PLUS ONE MONTH'S PAYMENT. **INCLUDING LEASE FEE. SOURCES: BANK LEASE CONSULTANTS; MAZDA
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