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Auto Leases: Sweet Deals or Honey Traps?

Auto Leases: Sweet Deals or Honey Traps?

In the US one in every four new cars goes off the dealer lot in a lease, not a conventional purchase.

“That is abruptly up from 11% of new vehicles as recently as 2009,” said Jesse Toprak, chief analyst at Cars.com.

He said it would not surprise him if the leasing market share continued to edge up. “I expect to see it as 30%,” Toprak said.

The reason? “With leasing you get a lot of car for your money,” he said.

Toprak elaborated that a “perfect” storm has produced very favorable lease deals. That’s because the monthly lease amount is a function of two factors: expected depreciation in vehicle value and the cost of money.

Interest rates of course are around historic lows and car depreciation – fueled in large part by a shortage of clean used cars – is also very low. Add those two facts together and, suddenly, it just may be time to take a look at leasing even if you never thought it would be for you.

Right now, a new BMW 320i is yours on a three year lease at $259 per month. $2,999 down rolls the car. Mileage is pegged at 10,000 per year.

On a purchase – with a five year note and $2,999 down – that BMW would cost upwards of $550 monthly.

Same car, more than twice as much, and you have to know a five year-old car long before gave up its new car smell. And yet that owner is still shelling out more than $500 per month so that he will eventually own it. Ouch.

That math, incidentally, is why Toprak said the lease share at luxury dealerships – such as BMW and Mercedes – approaches 50% and in some car fixated towns like Los Angeles (where you are your wheels), it may be as much as 70 percent, said Toprak,

First: understand that leases are not for everybody. High mileage drivers generally will not fare well (that’s anything over 15,000 miles per year). Also, if there is uncertainty in your life, leases probably are not a good idea. What if you take a job in Manhattan and move there, then what? Getting rid of a leased vehicle is not as straightforward as selling an unwanted purchased vehicle.

Your life is predictable and you drive a steady 12,000 miles a year? “Leasing will let you have a new car every two or three years,” said Toprak.

You will not pay major repairs either, because the leased car will be under warranty.

What if you go over the mileage allotment? That Bimmer lease, for instance, will nick you 20 cents per mile for overage – although BMW offers a “Mileage Adjustment Program” where in advance of the lease termination you can buy a bucket of miles at 16 cents apiece. Say you are 15,000 miles over. Pay $2,400 and you are even.

That sounds like a lot? If it does to you, then, maybe it is time to rethink your suitability for leasing. Lump sum payments – from a few hundred to several thousand dollars – often are part of lease termination. Fees are for excess miles and also sometimes, excess wear and tear. Not every lease ends this way but enough do so it is good to have spare cash on hand.

Another fact: although there is a car loan available for just about any buyer, only those with “good to great credit” need apply for leases, said Toprak. Do the math. Default on a typical lease in the first two years and the finance company is in a world of pain. That’s why leases are available only to blue chip drivers.

That said, it’s not just the uber rich (and wannabes) who are leasing. Joshua Duvall, a 27 year-old social media expert in upstate New York, said he leases a Nissan Sentra for $150 per month. He put down nothing. He gets 12,000 miles per year (mile overage is at 15 cents apiece).

On a purchase, with no money down and a four-year note, that Sentra runs over $300 per month.

Still undecided? Toprak said the Internet is awash with “buy vs. lease” calculators. Pick one, plug in your numbers, and let the math speak for itself.

But don’t forget this: the ultimate lease perk is that you never have to drive a truly beat car. At Toyota, for instance, a Prius can be yours on a 24 month lease. A Prius V rolls with $2,779 due at signing. The monthly note is $229. That buys 12,000 miles per year (extra miles are 15 cents apiece).

Just when that car is showing age, the lease is up and you are in another, new car. That’s a promise that is hard to top.

–Written by Robert McGarvey