The Los Angeles Times recently ran an excellent article on the intricacies of auto leasing. I say intricacies because there are many factors to evaluate before and during the process. As author Jerry Hirsch points out, failing to check and double-check any one of them can result in a deal you’ll regret.
The purpose of today’s Real World Finance article is not to summarize Hirsch’s article—click for the original Times story—but to focus on the financial aspect of leasing vs. buying.
The basics
According to the author, car companies are offering some pretty favorable terms right now. As an example, he cites Honda’s offer of a well-equipped Accord for $250 a month and no down payment or any other drive-off fees.
The rock-bottom amount you will spend on a standard 36-month lease for the Accord will be $250 x 36, or $9,000. That’s if you make zero mistakes when negotiating the deal and over the next three years.
Now let’s compare the financial cost of leasing vs. an outright cash purchase. We do that by either looking ahead three years and comparing costs (oh wait—nobody’s got a functioning crystal ball). We can do that only by looking back three years. A nicely equipped 2007 Accord EX-L could have been bought for $25,910. That’s $1,000 over dealer invoice, a deal anybody should be able to make. Today that same three-year-old Accord with low miles should sell for about $17,000 after a little negotiating.
Your cost to pay cash for and own the Accord for three years is $25,910 minus $17,000, or $8,910. Compared to the $9,000 lease that’s a wash, wouldn’t you say? So why not lease if the cost is the same $9,000?
The downside
The downside to leasing is, what if things don’t all go your way? Suppose something unforeseen happens:
• You get a new job two miles farther from home and put on an extra 20 miles a week. That’s an extra 1,000 miles a year. If you go over the allowance by 1,000 miles a year and pay $.20 a mile, those 3,000 miles will cost you an extra $600.
• Your dog barfs in the back seat and nothing will remove that gnarly stain. Normal wear and tear? I’m afraid not.
• For whatever reason, you must turn in the car early. That’ll cost you.
• Your lease terms aren’t quite as good as those described above. “Oh yes, ma’am, the $1,000 drive-off fee is standard…”
• The lessor pulls the old switcheroo and has you sign an open-ended lease, which means you will owe if the car is worth less in three years than originally thought. Whoops, that’ll be extra, too.
The upside
If you’ve got $26,000 lying around and are deciding whether to plunk it all down for the new Accord or do the lease, you could invest essentially all of it right now and then pay out the $9,000 over three years. Even at today’s ghastly rates, you could earn $800 in interest.
One more thing
Do you know the meaning of specialty lease terms like allowable mileage, capitalized cost, and gap insurance? You will need to know them if you want to come out alive after three years. Hirsch also offers a sidebar list of lease terms that you must know and understand.
