Leasing Vs. Buying: Some Consumer Tips From the Automobile Club
10 August 1998
Leasing Vs. Buying: Some Consumer Tips From the Automobile Club
LOS ANGELES--Aug. 10, 1998--As consumers browse auto dealership showrooms to check out the new 1999 models, they will wrestle with the auto-financing question of the decade: "Should I lease or buy?"
Thanks to new federal regulations, leasing costs are now easier to decipher and compare to purchasing costs, said David Cavano, automotive purchasing services manager for the Automobile Club of Southern California.
"Leasing can appear to be a more attractive option than buying because of lower monthly payments," Cavano said. "But in the long run, a car lease can cost consumers more than a car purchase, if leaseholders decide to purchase their car at the end of the lease and finance the remaining balance. That's why we are pleased the Federal Reserve Board approved new regulations requiring dealers to explain leasing prices thoroughly."
Even with the new explanation requirements, which took effect in October, understanding lease terms can be a complex matter. Cavano advises those in the market for a new car to ask themselves the following key questions:
-- Will I drive more than 12,000 to 15,000 miles a year?
-- Will I want to keep the car for more than three years?
-- Will I put the car through a lot of wear and tear?
If the answer to all of these questions is "Yes," then buying is likely a better option, Cavano said.
Leasing can be a better deal for a consumer who wants to drive a more expensive vehicle than he wants to purchase, especially if the vehicle holds a high resale value, Cavano said.
But contrary to the leasing explanations often heard in car commercials, leaseholders aren't paying only for their use of the car. They're also paying an interest rate, just as if they finance a car purchase.
Auto dealerships that arrange leases usually do not retain ownership of the leased car. Instead, a leasing company typically agrees to purchase the vehicle from the dealership at the price negotiated by the consumer. The leasing company then charges the leaseholder a "rate factor," or interest rate, which is included within the monthly lease payment.
Leaseholders also must pay an up-front "entry fee," similar to a down payment for purchasing a car. But the fee is typically much lower than a standard 10 percent to 20 percent down payment, Cavano said.
"Another key factor to investigate is whether the manufacturer is offering specially subsidized lease rates," Cavano said. "When leasing started becoming popular in the late 1980s, many carmakers were giving lease subsidies. But now fewer subsidies are offered because the manufacturers sometimes lost money on those deals."
New-car shoppers need to keep those factors in mind when they're out comparing prices. To do a fair analysis for those who only want to keep a new car for a few years, Cavano recommends calculating the total lease cost first. That should be weighed against the cost of financing the car purchase, then reselling the car after the length of the proposed lease.
Consumers can get a thorough explanation of leasing vs. buying vehicles at http://www.aaa-calif.com/auto-buy/buylease.html on the Automobile Club's Web site.
Information is available on leasing and buying in the AAA 1998 Autograph Book, which can be purchased at local Auto Club offices. The book also provides reviews and ratings of new cars, minivans, sport-utility vehicles and pickup trucks.
The Automobile Club of Southern California, the largest affiliate of the AAA, has been serving members since 1900. Today, Auto Club members benefit by the organization's emergency road service, financial products, travel agency and trip planning services, highway and transportation safety programs, insurance products and services, automotive pricing, buying and financing programs and legislative advocacy. Information about these products and services is available on the Auto Club's Web site at www.aaa-calif.com.
