Leasing? Know your facts

Leasing is a bugaboo that has had its own negative impact on the auto industry in the frenzy to get everyone into a new car, regardless of cost.

I received an email a while back asking for help. The writer had every auto journalist’s name you could think of in the address bar, so I didn’t feel special. Seems he’d been talked into leasing a car over buying it, felt scammed and couldn’t get out of it. He wasn’t a total idiot – I knew a guy who didn’t even realize he was leasing his vehicle until he’d had it a year.

I’ve known many car sales people. It’s a tough gig in good times. In many areas there are too many dealers, a fact reflected in a salesperson’s determination not to let you get out the door. The competition isn’t just from other manufacturers – it’s from the same brand only spitting distance away.

But buyers have been complicit, too. I have watched three friends get sucked into the leasing switch. Leasing is a bugaboo that has had its own negative impact on the auto industry in the frenzy to get everyone into a new car, regardless of cost. Many of the same economic gremlins are at work as we’ve seen in the U.S. housing sector, with no downpayments and artificial borrowing rates – costs are just ballooned down the line.

If you’ve been in a showroom, you’ve experienced it. As a salesperson scrawls down the numbers, you realize you’re way above budget. But wait! Let’s run the numbers if you lease instead!

Leasing is the answer for some, but it’s been promoted as a great option for everyone. It isn’t. You need to know your driving habits. You are responsible for all maintenance. Mileage can pile up fast if you have a long commute – and you will pay mileage costs outside of your original contract. If your job situation suddenly changes, that can be a costly factor. If you’ve only figured on going to work each day, you can forget the trip to Disney World. I knew a couple who parked a car for six months to wait out a lease – the overage charges can be steep; read the fine print.

Using round numbers, this is what happens: you point to the car you want. It turns out it will cost $750 a month to purchase it with a loan, over four years. You don’t have that much, so you start to leave. Wait. You can lease it for $500 a month. You sit down again.

For someone who can take advantage of car costs at income tax time, leasing can make great sense (your accountant can advise you). But if you can’t, it’s a hefty price for something you are essentially renting.

Often the pitch is you won’t have to contend with big repair bills. But does everyone really want a car payment to go on forever?

Why is it cheaper? Isn’t it the same car? Yes, but the owner – the leasing company – is taking a gamble on the residual value of that vehicle at the end of the lease. It counts on being able to turn it around to make money on it, which means you’ve paid out the depreciation, performed the maintenance, while it comes out ahead.

But the industry has been a victim of its own leasing success – the market has been flooded with returned vehicles, with few meeting a residual value high enough to make a profit. Remember, that leased price had to appear substantially lower than a loan cost to make the deal sweet.

Last summer, GMAC leasing and others stopped offering barrel-scraping lease rates as incentives – dealers realized they’d made too many cars into boomerangs.

Carmakers are being forced to smarten up. Buyers should too.

Lorraine Sommerfeld’s column appears Thursdays on

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