Resurgence of car leasing may not be good thing

Consumer Reports News: April 12, 2011 03:48 PM

Despite reports in 2008 that car leasing was all but dead, leasing has made a comeback, as consumers try to cram every bit of car into a relatively low monthly payment. But just because leasing is popular again doesn't mean it's a good thing.

Leasing generally is the most expensive way to drive a new car. To see why, consider that leasing is just another form of financing. Whether you lease a $30,000 car or take out a loan to buy it, you're borrowing $30,000. And you'll pay interest on the entire amount minus whatever you pay back. And there's the rub. With a loan, you'd pay back everything. But with a lease, you'd pay back only the projected loss in the vehicle's value during the lease period—the so-called depreciation. That leaves a greater amount subject to a finance charge every month. Although leasing has lower monthly payments, once you factor in that you won't own the car at the end, leasing ends up being more expensive than buying with an equivalent loan. That typically is the case even if you take into account the sales tax benefit you get from leasing in most states and the net interest you'd earn by investing the difference between the lease and loan payments.

But there's another big factor that makes leasing more expensive. Lessees often end up in a cycle of getting a new car every few years, the period during which cars lose their value the fastest. That typically leaves them paying much more than if they bought a new car with a loan and kept it for four years or longer.

While leasing may be fine for those who have extra money and don't mind paying more, it's often the financing method chosen by those living on the financial edge. They can't afford the loan payments for a new car (or at least for the new car they want), so they opt instead for a lease.

Here's a strategy to consider instead. Opt for a car that you can afford by taking out a loan of no more than four years, after deducting the value of any down payment or trade-in. If no car fits the bill, consider buying a used vehicle or holding on to your current ride until you can stash away some more cash. Once you have a new car, maintain it according to the manufacturer's recommendations. As long as the vehicle is reliable, holding onto it typically is your best financial bet. But if a new car every few years is your goal, simply pay off the first one and roll the equity into the new vehicle. Eventually you'll end up with a lease-like payment without the extra costs.

Anthony Giorgianni

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