In this NEW CAR BUYING GUIDE version of Point/Counterpoint, publisher Sandra Kinsler goes one-on-one with

Philip says...

I have acquaintances who look upon auto leasing as a giant ripoff. In their view the rates are too high, the terms are sinister, and only the banks can be depended on to treat us fairly. This hasn't been my experience. I've leased several cars over the past two decades and always finished ahead of the game, usually by exercising the buy-out clause before the end of the lease term and selling the car at a profit.

Am I wrong about leasing, Sandra? Should we all sign for a bank loan? (I'm talking about individuals, not business people who can afford a write-off.) Is car leasing really a bottomless pit into which the hapless lessee pours money? And what about those manufacturer-supported financing plans, especially when offered at rock-bottom rates?

The problem, as I see it, lies in the price of today's cars. They're too darned expensive (for all but the rich) to pay cash. Without a substantial amount up front, bank loans can result in high monthly payments. Leasing makes it possible to acquire a new vehicle for a reasonable cost per month and it seems to me that without the lease system a growing number of North Americans could not afford a new car at all.

Perhaps we should refer to car leases as mortgages. That's a term people can understand, though it does have connotations of lifetime commitment. With 5-year leases becoming more common, the resemblance to a mortgage is not quite so far-fetched. Fortunately the lengthening of lease paybacks is being matched by longer and more extensive warranties, guaranteeing that the car should continue to be protected through most of the term.

When people ask me about leasing vs. loans, I say "lease." There are ways to avoid the pitfalls, one of which is to compare rates and check the fine print. You don't have to lease from the selling dealer and you needn't let a lease company decide the price of the vehicle. Nothing wrong with negotiating the vehicle cost from a dealer, then seeking a lease operator to offer the best rate. After all, an auto lease firm is little more than a financial broker.

Or maybe I've just been lucky. Leases are money minefields after all. Banks offer the best buys and someone's uncle in Nebraska said you should never borrow cash to purchase anything. Help me out on this one, Sandra; you're the economics expert. Your advice on buying, leasing, or "what to drive for forty years while you're saving the cash for a new Camry" could be helpful to many of our viewers. Including my recalcitrant buddies.

Sandra says...

One of these days, we're going to have to find a subject on which we disagree. We too see that leasing has value, not only for business owners that can utilize the write off, but for most automotive consumers as well.

Though I too lease my car, I happen to be a person who is credit averse. Credit ruins people's lives by motivating us to spend more than we can afford. We don't realize the impact interest rates have on what we spend. So, fundamentally I agree with the Nebraska Uncle. But given that a consumers accept credit, leasing allows consumers to drive more car than they can afford to buy. Most people don't want to buy the more affordable entry level vehicles because they aren't cool and don't have the fun and practical bells and whistles. Cars have become so much a part of our personality statements that if we don't drive the latest and greatest, it is an affront to our egos. If we were willing to buy basic transportation, we could afford to own it. But if we want what our pocketbooks can't afford, leasing is the way to go.

Cars are indeed expensive, but so is the cost of developing the technology that makes the cars safer, more fun to drive and more feature filled. Much of the price of cars is a reflection of the automaker's investment. Features contained in modern cars are there because the buying public (and the government) demand them -- we vote with our checkbooks. I've never, ever heard of consumers participating in focus groups telling automakers to remove features. They always ask for more.

From a practical standpoint Michael Kranitz, NEW CAR BUYING GUIDE's leasing expert, reminds us, "Prime among the 'lost issues of leasing' is the great equalizer in lease vs. buy comparisons -- interest and investment savings. Consider that every dollar you do not spend up front each month paying for your vehicle can be used for something else like paying off credit card debt, investing in the market or purchasing that new Pentium system you've been eyeing. Rough translation: leasing frees up cash for you to do other, more productive things."

With more money in their pockets consumers have more to spend on other things. Our Associate Editor Karyn Sultan leased a new silver Mazda Miata (she looks fabulous in it by the way) and used the balance of what she would have paid to own the car to buy a new computer. Leasing has its merits for everyone: it can leave more cash in the pocket and allow people to drive hipper cars that are more fun to drive. Being the hedonist that I am, I think that's great!

However, the lease process must be approached cautiously. Because of the way leases are marketed, consumers are led to believe they have no control over the terms and thus the monthly outlay. Consumers MUST study up before starting the process of negotiating a lease. Leases are more user-friendly these days, being a reasonable length and readable. If you are looking at a lease that is too complicated, find another leasing agency with terms that are clearly stated and understandable.

NEW CAR BUYING GUIDE offers many articles on the leasing process in the Car Shopping section of the publication. Michael Kranitz also offers excellent leasing advice on LeaseSource.com, publishes several excellent books on leasing, offers a software program designed to help consumers negotiate the process and even provides comparative lease/buy calculators. The money saved by taking his advice will pay for the books and software many times over. Karyn will vouch for that.

When leasing, consumers MUST negotiate the price of the car in the same manner as a purchase -- get the invoice price from a web site and add a few hundred dollars for the dealership. Consumers need to understand all the lease terminology, how it effects their monthly payment and the price of the vehicle at the end of the lease. Terms to learn include: residual value, cap reduction, acquisition fee, money factor and rent. Understand the relationship of these numbers to one another. As you negotiate, write down each number. Better yet have the dealer write them down. Make sure the vehicle price you negotiate appears on the paperwork. For some odd reason, that number has a magical way of changing when the final paperwork appears. Also, remember that the amount of mileage that can put on a leased vehicle is limited. If the lessee goes over the limit, they'll be charged. On our last lease we owed $1,500 on extra mileage alone even though we returned the car in top-notch condition. However some captive finance companies (the finance companies owned by the automakers) have begun to mitigate that problem. BMW now waives reasonable over-mileage if at the end of the lease another BMW product is purchased or leased. This option is available from other automakers as well.

Good lease deals that come from the captive lessors are something all consumers should consider, especially if they want more car than they can afford to buy. And for me, a cool car is one of the great joys of life. It is one of the reasons I work as hard as I do, and I've earned the right to have a good time when I get on four wheels.