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Look Before You Lease

Leasing is a viable and efficient method for consumers to drive a car or truck of their liking. Leasing enables you to lease a more expensive car than you could afford to purchase. But -- look before you lease!

The first thing you should know when leasing a vehicle is that someone is actually buying the vehicle -- it's just not you. In most lease deals, the lessor (usually a bank, independent leasing company or captive finance company such as GMAC, Toyota Motor Credit) buys the vehicle from the dealer or manufacturer and then leases it to you. You, in turn, pay the lessor for the right to drive the vehicle during the term of your lease.

The difference between monthly lease and loan payments is simply the amount you are repaying. In a vehicle loan, you repay (through a combination of down payment and monthly payments) the entire price of the car. In a lease, you do not repay the entire purchase price of the vehicle. Instead, you repay the portion of the purchase price which represents the vehicle's decline in value, or depreciation, over the lease term. In addition to the depreciation, you must also repay any other items you rolled into your lease, such as acquisition fees, negative equity on a trade-in and after-market products (i.e. extended warranties).

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 and 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."

Here‰s a simple example: Consider a vehicle with a 20,000 price tag, which you can lease for three years with nothing down and a monthly payment of $385.00 or buy over the same period for $2,500 down and a monthly payment of $595. A cursory lease vs. buy analysis would reveal that after three years, the lessee would have paid $14,136 whereas the buyer paid $23,950. Of course, the buyer owns the car at the end of 36 months and the lessee does not. Therefore, we give credit to the buyer for the value of her vehicle at the end of 36 months. In your analysis, it is best to estimate roughly 90% of the vehicle‰s ALG (industry-standard Automotive Lease Guide ) residual value. This gives you a good idea of the wholesale value of the vehicle at the end of the term. In our example, it‰s $9,900. If you credit the buyer with this amount, her gross cost to drive over the three years is $14,050!

Now it appears that buying was cheaper over the long run -- the very same conclusion most commentators use to illustrate the cost of leasing vs. buying over the long haul.

But, this is where the story gets interesting. What would happen if we considered what our lessee did with the extra cash she saved up front (roughly $1,700 if you consider she had to pay first month‰s payment and security deposit) and on each monthly payment (about $200)? If she invested the money at 7% she could have generated $1,227 before taxes! That would bring the net cost of leasing down to $12,900, an amount less than the total cost to purchase the vehicle! Even at 3%, the savings is $500, making you rethink the gospel that leasing is more expensive in the long run. If you use your extra cash to pay high-interest credit card debt, the savings is even greater. The point is, you should consider what you will do with the extra money you save when comparing leasing to purchasing. In addition to hard investment dollars earned, you should also consider the intangible benefits of having free cash around to spend on other things. This is especially important if your extra cash will be used to purchase assets for your business. One of the principal reasons businesses opt to lease depreciating assets, like cars, is that it frees up capital to use in more productive ways. You can put the same logic to work for you when you go shopping for your next car or truck.

There are resources on the Internet and offline to help you through the calculations. One place to look is LeaseSource web site . You will find information on LeaseWizard Jr., an online lease vs. buy analyzer among other resources. You can read more about this topic and virtually any other leasing topic you can think of in "Look Before You Lease: Secrets to Smart Vehicle Leasing" which is available in bookstores and downloadable from the LeaseSource site.

Michael Kranitz is a lawyer and consumer leasing expert who has appeared on hundreds of radio and television programs nationwide to advise consumers on leasing. He created LeaseSource and wrote the popular LeaseWizard Lease and Loan Software, which was recommended in Motor Trend Magazine and Automobile Magazine

Reprinted with permission from LeaseSource Online . Portions Copyright © 1997 Michael S. Kranitz, all rights reserved.