Is It A Deal? The Arithmetic Of Leasing

As carmakers jostle for a marketing edge, the decision to buy or lease a car is getting increasingly complicated. Bargains are there if you keep a sharp eye--and know what to look for. Last summer, for instance, Honda Motor Co. gave cut-rate leases on '93 Accords to make way for '94 models. A lease on a $47,000 Infiniti Q45 sedan includes an automatic break of up to $10,000. Q45 buyers, by contrast, have to bargain for every penny.

Before racing off to find your dream-mobile, though, make sure leasing is for you. Buying or financing a car is still the best choice for many folks. You might lease instead if you want lower monthly payments or have little cash for a downpayment--though you will have to pay a one-month security deposit. Remember that leasing is just a long-term rental arrangement; at the end, you own nothing at all. What's more, leasing carries risks. Be sure you can stick with the full two- to four-year term, since bailing out early may cost you up to six extra monthly payments. And you should also know that in many states, leased cars aren't covered by "lemon laws."

There's more to be wary of. If you drive a lot, the typical charge of 12 to 15 for each mile over the allotted 12,000 to 15,000 can drain your bank account. When you turn the car in, you'll pay for anything beyond normal wear and tear. Also, find out what happens if the car gets stolen or totaled: Your insurer will reimburse you for the car's market value. But that may not cover what's due on the lease. So-called gap insurance can bail you out, but don't pay a lot for it. Haggle, and the dealer may throw it in free.

CORPORATE WELFARE. If you can dodge these potholes, the newest leasing deals may change the rules of the road in your favor. The most tempting leases, for two or three years on many family sedans and luxury cars, "are being subsidized anywhere from $3,000 to $10,000," says Dick Biggs, president of Biggs Automobile Leasing Corp. in suburban Atlanta. Those subsidies are cash the carmaker gives a finance company to lower lease payments. They can make a big difference. A Cadillac DeVille with a sticker price of around $35,000 and a $2,200 downpayment currently leases for about $469 a month for two years on a subsidized plan, vs. $736 with no subsidy.

You'll want to decide whether to make a downpayment: If you can handle slightly higher monthly payments, you may want to keep your wad of cash to play with elsewhere. For example, skipping the $2,000 downpayment on a $23,000 Chevy Blazer means you'll pay $357 a month for two years--$86 more a month. If you kept the $2,000, you could earn $420, assuming a 10% annual return, for a net gain of $356. Of course, if you only earn 5%, your gain isn't much.

In short, picking out the best deal can be tricky, and some dealers don't help. In most states, they aren't required by law to disclose all the leasing details--not even the car's price, which is the starting point for figuring payments. Still, many dealers will tell you what you want to know. If yours won't negotiate openly, move on.

To figure out what kind of deal you're getting, approach the question as a banker would. For starters, you need to negotiate a price. In leasing jargon, this is called the "capitalized cost." Let's assume that's $20,000 (or $18,000 if you make a $2,000 downpayment). Next, determine the car's "residual value"--its worth at the end of the term. You can find that in Automotive Lease Guide, a reference volume found in banks or the library. In this example, a car with a residual value of 50% will be worth $10,000 at the end of the term. The difference between the residual value and the original price is the depreciation. Divide that by the number of months--say, 24--and you get $416.67.

Calculating interest is the next step--and you may wish you had learned your high school math. To figure it out, add together the car's original price and its residual value ($30,000 in the above case) and multiply by what leasing companies call the "money factor." Let's say that's .00375 or the equivalent of about 9% interest--yielding a sum of $112.50. Add that to the monthly depreciation, and you get your unsubsidized payment: $529.17. By comparing that total with the payment the dealer is offering, you can determine the subsidy. Auto makers usually either subsidize the interest rate or jack up the residual value to reduce your payment. If you plan to buy the car when the lease ends, you should check whether the residual value has been inflated. A glance at Automotive Lease Guide can tell you.

DOWNPAYMENT DECISION. Some other techniques may save you money--depending. Lexus and BMW will lower your monthly payment if you put down a larger-than-required refundable security deposit. For example, the deposit on a typical three-year lease with $550 in monthly payments is $550. If a buyer plunks down $3,300 instead, the monthly payment drops by $50, a reduction of $1,800 over three years. That's a good deal if you think you can earn only 10% a year by investing the $2,750 you don't have to put down--which would net roughly $900. But if you plan to make 20% a year playing the market, the larger security deposit doesn't make sense.

Leasing adds complexity to the already difficult decision of what vehicle to buy. But if you take the time to dig into the numbers, it may pay off for you.

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