5 myths about leasing a car
Don't believe everything you've heard. For many drivers, leasing can be a better deal than buying. Here's what you need to know before you head into a showroom.
By Kiplinger's Personal Finance Magazine
Leasing often gets a bad rap, and no wonder: Its confusing argot sounds like fodder for a course in high finance, and dealers have been known to slip bad deals past confused car shoppers who simply wanted low monthly payments.
About 20% of new-car transactions are leases, but more people should be leasing. As interest rates rose, automakers shifted incentives from rebates and low-interest financing to leases. If you know what you're looking for and negotiate smartly -- and get over the five myths below -- leasing can be a good deal.
1. Buying is cheaper than leasing.
If you keep a car well past the day the loan is paid off -- or you paid cash to begin with -- you save money by buying. But if you trade in your car before the loan is paid off, the value of the trade-in is unlikely to cover the remaining balance on the loan.
For example, if you leased a new Chevrolet Malibu LTZ for three years, your monthly payments could be $489. When you turned in the car at the end of the lease, you'd pay a "turn-in" fee of $395 and then walk away. If, however, you bought the Malibu with a five-year loan at 7.9%, your monthly payments would be $546, and after five years you'd own the car free and clear.
But say you want another car after three years. To match the residual value written into a three-year lease, you'd probably have to sell the Malibu on your own rather than trade it in. Then you'd have to pay off the loan. Buying would leave you about $1,600 poorer.
2. It's nearly impossible to negotiate a good deal.
Leases are negotiable. But first you need a tour of the jargon:
- Capitalized cost. The vehicle price is called the capitalized cost. You should haggle over this just as hard as you would haggle over the price if you were buying.
- Money factor. Another crucial term is the money factor. The lower this number, the better (multiply it by 2,400 to get an estimate of the interest rate). Dealers are sometimes reluctant to reveal the money factor, so be persistent.
- Residual value. Finally, the residual value is the value of the car or truck at the end of the lease.
An inflated residual value lowers your monthly payments, but it can also handcuff you.
A more realistic residual value will make it easier to sell the lease, trade your vehicle midlease or buy the vehicle at the end of the lease, says Tarry Shebesta, the president of Automobile Consumer Services, a leasing service in Cincinnati.
Ask the dealer to show you deals from several banks, focusing on the money factor and the residual value. You can also go to LeaseCompare.com to comparison shop and apply for a lease. Or check out LeaseWise: For $335, the service will shop five dealers in your area.
3. Only businesses get a tax break on leases.
Tax laws allow businesses to deduct monthly car-lease payments as expenses.
But most individuals get tax breaks, too. In most states, you pay sales tax only on the monthly payments, not the sale price of the vehicle. In the Malibu example above, you'd owe taxes on about $18,000 in payments rather than the $27,000 sale price.
Arkansas, Maryland, Minnesota, Texas and Virginia charge sales tax on the entire sale price.
