Leasing Is Alive and Well

published 30 April 2009

To paraphrase Mark Twain, reports of leasing's death are greatly exaggerated. Even while auto sales hover at depressed levels not seen since the recession of the early 1980s, the major leasing players -- luxury carmakers -- are still writing leases. Some, including Acura, BMW and Mercedes-Benz, are even throwing money into the deals to lower monthly payments.

Banks and carmakers retreated from leasing last year after truck and SUV sales cratered due to soaring gas prices. Gas guzzlers languished on dealers' lots and owners tried to dump them, which decimated their resale value. Financial institutions that had written truck leases -- mainly the financing arms of the Detroit automakers -- lost a bundle when leasers turned the vehicles in. As a result, General Motors and Ford put the brakes on SUV and pick-up leases, and Chrysler is no longer writing leases at all.

Pros of leasing. Although the game has changed a bit, much about leasing is the same, says Tarry Shebesta, president of LeaseCompare.com. Leasing still makes sense if you trade in every few years and always have a car payment. You get all the perks of driving a new car but, because you pay only for the depreciation during the time you lease the vehicle, you also get lower payments than if you had bought and financed it. And with most lease terms, the new-car warranty never expires. That's why luxury cars (and until recently, pricey SUVs and pickups) are leased so often.

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You also have the ability to ride out economic turmoil of the sort that rocked leasing last summer. For example, owners of trucks and SUVs had to eat the loss in value of their vehicles when they traded them in. But if you leased, the bank (or the carmaker's financing arm) took the resale-value hit, not you.

Digging for a deal. Before you can spot a bargain, you need to understand leasing jargon. Residual value (or resale value) is what the vehicle is expected to be worth at the end of the lease and is the same as, or close to, the purchase price you'd pay then. Money factor is the interest you'll pay. You multiply that number by 2,400 to get an estimate of the annual percentage rate. Capitalized cost is the price of the car.

As carmakers struggle to move vehicles, you'll see more leasing incentives -- known as subventing. A subvented lease may feature an artificially low money factor or an inflated residual value, both of which lower your monthly payments. Shebesta notes that when you compare lease terms, you may find that a high residual value and a high money factor could produce the same payment as a low residual and a low money factor. The latter is a much better deal because you'll end up with a more realistic value, meaning you'll pay less if you decide to buy the car.

Choosing a high residual value to lower monthly payments might be worth it if you plan to turn in the car at the end of the lease. But because you're not paying enough each month to keep up with the actual depreciation, you'll pay a few grand more than market value if you want to buy it. And if you have to turn in the car before the lease is up, you'll owe a bundle in addition to the early-termination fee.

Before you hit the dealers, pit the carmakers' lease terms against leases from independent leasing com-panies and banks at Lease-Compare.com to find different options. For example, Honda Financial recently offered a 36-month lease on a base-level Acura TL (price: $35,715) for $399 a month. It assumes a residual value of $22,143, which is also the purchase price. Running the same numbers on LeaseCompare.com, we found a three-year lease on the TL for $464 a month with a purchase price of $20,708.

Plus, the LeaseCompare deal allows 12,000 miles a year, compared with 10,000 miles from Honda Financial (with a 20-cent-per-mile penalty on additional miles). If you drive the extra 6,000 miles over three years, the LeaseCompare deal saves $1,200 on mileage.

Anderson has been with Kiplinger since January 2004, when she joined the staff as a reporter. Since then, she's covered the gamut of personal finance issues—from mortgages and credit to spending wisely—and she heads up Kiplinger's annual automotive rankings. She holds a BA in journalism and mass communication from the University of North Carolina at Chapel Hill. She was the 2012 president of the Washington Automotive Press Association and serves on its board of directors. In 2014, she was selected for the North American Car and Truck Of the Year jury. The awards, presented at the Detroit Auto Show, have come to be regarded as the most prestigious of their kind in the U.S. because they involve no commercial tie-ins. The jury is composed of nationally recognized journalists from across the U.S. and Canada, who are selected on the basis of audience reach, experience, expertise, product knowledge, and reputation in the automotive community.