Do I Lease Or Buy A Car?

With new car prices about double what they were a decade
ago, more Kentuckians are leasing cars, trucks, or vans.

Leasing could be your best option if you can’t afford
a large down payment, prefer not to tie up your cash, or simply like to get a
new car every two years or so. Leasing also may make more sense if you use the
car or truck for business purposes.

For the past few years, nearly one in three consumers
has leased their new cars; the total climbs to nearly 50 percent of luxury models.

"If you trade in your vehicle every three or four
years, why pay the full price? Why not just pay for the time you use it?"
goes a popular sales pitch for leasing.

Lease terms

"Lease transactions are a tangle of arcane
language and buried details that can ensnare even the most wary consumer,"
says Lou Richman, finance editor of Consumer Reports magazine, which offers
in its January 2001 issue tips on saving money when leasing a car.

Although it’s difficult to precisely compare one
lease with another, it’s best to concentrate on these factors, all of which
are negotiable:

• Gross capitalized cost, or the sale price.
• Capitalized cost reduction. That’s the down payment.
• Residual value. This is what the leasing company or bank estimates the car
  will be worth at the end of the lease. You, therefore, are financing the difference
  between the cost of the car or truck when it is new and its value in three
  or four years, plus taxes, the dealer’s profit, and other extraneous costs.
  This number is critical because the higher the residual, the less you’ll pay
  for depreciation and the lower your monthly payment.
• Term. Leases typically run from 24 to 48 months. This makes leasing attractive
  for people who want to drive a new car, because leasing allows a person to
  shift from car to car without the hassle of selling, and allows you to avoid
  the need to come up with a large down payment.

At lease end

Most leases allow driving 15,000 miles a year.
More than that will cost 10 to 20 cents a mile, if you turn in the car rather
than buy it. Also, if the car is not well-maintained, be prepared to pay for
dings and dents and torn upholstery at lease end.

An estimated 5 million vehicles are expected off
lease this year.

A new car loses about 30 percent of its value in
the first two years; some dealers believe these lease returns are today’s best
deal because the buyer finds this depreciation already paid by the original
lessee.

Loan rates

So what’s a potential buyer to look for?

While some manufacturers offer super low rates on
new cars, they usually require that the loan be paid off quickly or insist on
a hefty down payment.

A four-year new-car loan, with 10 to 20 percent down
payment, through traditional bank financing can run 8 or 9 percent. Buying a
one-year-old car usually finds it coming with a higher loan rate.

Remember, too, that unless you’re using the new vehicle
for business, the loan interest isn’t tax-deductible. So you might consider
using a home-equity loan when buying that new car or truck; interest on home-equity
loans generally is tax-deductible.

Car shopping on the Internet

More and more car shoppers are turning to the
Internet to shop for a new vehicle.

It is a fast, easy, and convenient source of data,
with 54 percent of new-car buyers using it to gather information, according
to JD Power and Associates, an automotive research firm.

But only 1 percent actually buy from the Internet;
the rest show intent merely to gain information to leverage against the dealers
in their local market.

The Internet offers thousands of Web pages with information
about new vehicles, but most consumers apparently can’t resist the pull of the
showroom where they can "kick the tires." The virtual world cannot
replicate this.

Many car dealers and most banks have Web sites to
offer financing help; most Internet shoppers don’t have the credit-card maximum
limits to permit them to "point and click" on a car, then put it in
their "shopping cart," charge it to the credit card, and have it delivered
to their home.

Therefore, dealers and traditional financing continue
to dominate the market, juggling trade-ins, the size of the down payment, and
total vehicle cost.