Car lease ads reveal the benefits of buying

There are some tempting car lease ads right now, but are they truly good deals? Perhaps they are useful in the short-term, but our analysis of recent newspaper ads reveal that traditional buying leads to long-term savings.

We looked at recent newspaper ads for outgoing 2012 models, two for the Toyota RAV4, and one for the Subaru Outback, plus one continuing model, the Mini Cooper Countryman.

We compared ownership scenarios covering the same number of years for each car, based on a multiple of the lease term. This approach captured the effect of equity in the loan. So if an ad promoted a 36-month lease versus a low finance rate for 60 months, we assumed you leased the same model twice on the same terms over six years (versus buying it once on the longer, 60-month loan) and sold it a year after the loan was paid off.

We took automakers' (or dealers') offered finance rates for the loan if available, or prevailing national average interest rates if not. For leases, we calculated the effective interest rate based on the monthly payment, and assumed the same rate for all subsequent leases to keep the comparisons straightforward.

We also factored in maintenance and repair costs. This exclusive data was taken from Consumer Reports' owner cost data, collected from our Annual Auto Survey. This real-world data, based on 1.3-million subscriber-owned cars, gives a valuable insight into the impact of ownership over time. (For each comparison, we assumed the same annual mileage buying or leasing--the maximum allowed under the advertised leases, ranging from 10,000 to 12,000 miles.)

Of course, we included any lease acquisition or disposition fees listed. Acquisition fees were usually lumped into a "due-at-signing" figure. Any amount due at signing, for leases or loans, we assumed were covered (exactly) by the value of your trade in. However, on subsequent leases, with no trade in, we assumed this would have to be wrapped into the payments. The lack of any down payment (or "cap-cost reduction" in lease parlance), as well as more realistic residual values not artificially subsidized by the automaker, substantially raised the monthly payments on subsequent leases.

And that's the main danger of leasing: You can get lured in by the low initial payment, but beware: All the financial factors effectively ensure your monthly payment will be much higher in subsequent leases. This makes it hard to break the cycle and purchase cars with a sizable down payment.

The one thing none of the low lease payments in the ads accounted for was sales tax, which is factored onto the calculated monthly lease payment in almost all states.

Scenario: Toyota RAV4

The ad: We found two ads for a four-cylinder Toyota RAV4. Due for redesign, the outgoing model is one of our top-rated small SUVs. One ad was from a Westchester County, NY, dealership for $159 a month for 36 months. The other was an online ad from Toyota for $189 a month, also for 36 months. The down payments were similar, $2,381 versus $2,540. The dealer was discounting the car for $726 below sticker. Otherwise, there seems little room to dicker on the RAV4. For a purchase, Toyota offered an interest rate of 2.9 percent for 60 months. The dealer offered 0-percent financing.

What we found: Both RAV4 leases ended up more expensive. The manufacturer couldn't match the dealer's $159-a-month offer, which cost just $4,800 more than buying the car over six years. Toyota's $189 lease deal would have cost you $5,600 more than the comparable loan.

Bottom line:
Any way you look at it, leasing is a convenience that you'll pay for in the end.

If you can't afford to buy the car with a four-year loan, then you can't really afford it. In the next installment, we'll look at more conventional lease scenarios.

Related:
Cars lease ads don't always add up
Buying vs. leasing basics
How to get the best lease
Guide to lease terms
New car buying advice
New car buying guide

—Eric Evarts