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What to Do When the Lease Bug Bites
by Marc Eisenson

The lease bug is surely on the loose, accounting for 29% of all new car sales. The more you know about life in the leasing jungle, the less likely you are to get stung, next time you're car shopping.

But first a disclaimer: I've never owned or leased a new car ... and probably never will. I like cheap, well maintained used cars -- and I only buy ones I can finance with cash.

Since you might make a different decision, here are the facts of leasing life -- how to get the most for the least:

1. Never, never, never! Never make your decision based only on the monthly payment. Make sure you know the bottom line, total cost for each option you're considering. Invariably, a salesperson's first question will be "How much can you afford a month?" Your best response: "How low can you go on the purchase price?" Your worst answer, something like: "$300 a month."

2. Buy first. Always price shop as if you were going to buy. Only after you've agreed to a bottom line price, should you break the news that you might consider leasing. And in case you didn't hear me before, never, never, never answer the "How much can you afford a month?" question. Once they have that number, all they have to do is "reel you in."

3. Small Print = Warning. That tiny type on the bottom of your TV screen ... under the flashing $199/month ... will up your actual cost. In fact, even if you disregard the fine print, and forget about sales tax, registration, and insurance -- which all come to a pretty penny on a new car -- there's still income tax to factor in.

If you're in the 28% tax bracket, you'll need to gross about $520 every month to make a typical $375 lease payment. And that doesn't include the cost of state and local taxes, or Social Security ... or any food, clothing, or shelter. If you earn $15 an hour, you'll work about one week a month ... some 60 days a year ... just to drive that car.

4. Leasing could be forever. Think about it: you could end up making payments for life. When the lease ends, what will you do? Begin a new lease on a replacement buggy? Come up with a pile of cash to buy the car? Take the bus?

But if you buy the car outright, payments will probably stop before the car does. So after you've been shown the figures proving that a lease will cost you far less than an equivalent loan -- look further down the road. After the loan's been paid off, the car will actually be yours, free and clear, but payments on a new lease will have just begun.

5. Dealers love to lease. They usually get a higher price for the car, because Americans haven't yet learned that leases should be negotiated. Instead, they pay top dollar and take the hit for those first few, very high depreciation years. The lucky dealer gets back a well maintained, low mileage, used car to sell.

6. Negotiate, negotiate, negotiate! Negotiate every bit as hard for the lease as for the purchase price. Your monthly payment and total costs will depend on: how much you pay up front, how many miles you'll be driving, what interest rate you'll be paying, what the future resale value of your car will be ... plus all the up-front fees, end of lease fees, early termination fees, excessive wear and tear fees ... . If they can dream it up, you'll be asked to pay for it.

7. Don't do it in the showroom. Insist on taking home a sample contract to study. Be sure you understand every single word. It could save you a wad. Watch out for an early termination fee, which will kick in in you introduce the car to a tree or opt out of the deal for any other reason.

For a few hundred dollars, although sometimes it's thrown in, "GAP" insurance is available to protect you against "hit a tree" termination. But only you can prevent those dents or stains that could cost you an excess "wear and tear" charge.

8. How far will you go? Most leases permit $12,000 to 15,000 miles a year. If you cruise further, you'll pay more ... a dime or two per mile. At 15 cents, an extra 10,000 miles will cost you $1,500 -- $62.50 a month on a 2-year lease.

9. A "closed-end" lease is what you want. With an "open-end" lease, you could be hit with a whopping termination charge ... should the car be worth less on the used market than was originally anticipated. With a "closed-end" lease, resale value is the leasing company's headache.

10. Drag out that old crystal ball. There are plenty of services that can tell you what the dealer paid for a new car, but what its resale value will be, after the lease has come to an end, is anybody's guess. (For a professional guess, see the Automotive Leasing Guide -- available from the dealer or at your library.

Agreeing to a high resale value (aka: the residual) will lower your costs. If the residual ends up being less, the dealer eats the loss. If it ends up being even higher, you might choose to actually buy the critter at a bargain price.

11. Timing is everything. Lease early in the model year to avoid mid-season price hikes and a lower residual value. In other words, it'll be cheaper.

12. Is your balloon full of hot air? A lease is essentially a loan with a balloon payment due at the end. For the term of the lease, you'll be paying an often undisclosed amount of interest on the full purchase price of the car, less your down payment, if any.

Unlike typical car and home loans, leases aren't paid off by the end of the term. Instead, there's an amount due equal to the value of the car. You either return the car -- or hand over the cash to buy the beast.

13. Don't put your pocket change here. While most car loans will cost far less if you always pre-pay, it won't save you a nickel on a lease. You'll pay the full price, whether or not you do it early.

14. The rebate goes to the leasing company ... unless you structure the deal differently. (Remember: everything's negotiable.) Sometimes they will give you the benefit of any rebate to make the sale, but don't depend on it. Ask!

15. Who do you love? They'll probably try to sell you some credit life insurance, naming "guess who?" as beneficiary. Skip it. If you want additional insurance, a regular term policy will be cheaper. Put your premium where your heart is, and protect your family directly.

16. Remember what the bottom line really is. The reason lease deals look better than purchases is because you aren't buying the whole car. You're only buying the difference between the new car's cost and its residual value. While your monthly payments will be lower, at the end of your lease all you'll have is an empty garage.

17. The exception that almost proves the rule occurs when manufacturers and dealers get together to offer the leased car equivalent of a rebate. Subsidized through their own finance companies (like GMAC), "subvented" leases really can be good deals.

Unfortunately, these bargains are likely to be for the least desirable cars on the lot. And you'll still need a replacement lease when the lease ends! If you're willing to buy the car at the end of the lease, why not buy a "post-leased" car right now?

18. Used is common sense. Having written this article, I've been reminded of just how complicated and expensive leasing can be, and why I've never bought a new car.

So trust me, and consider my final tip: Buy ... or if you must ... lease a well maintained used car. Someone else will have taken the heaviest depreciation loss, and you'll have a reliable, already broken-in means of transportation. It's a lot easier than you may think to make sure you get a good value.

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Reprinted from The Pocket Change Investor © 1995, Marc Eisenson & Nancy Castleman

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