When leas­ing a new car is a bet­ter op­tion than buy­ing

Kuwait Times - - BUSINESS -

Car shop­pers are be­com­ing more ea­ger to lease than to buy cars, ac­cord­ing to re­cent data. More than a third of all new-car own­ers leased rather than bought in 2016. But the sta­tis­tics don’t tell the whole story. Many car shop­pers don’t set out to lease a new car, but once they run the num­bers, leases look like a much bet­ter deal. Here are three rea­sons why:

1. Car-buy­ing pay­ment shock

Leas­ing doesn’t even cross some car shop­pers’ minds un­til they see how much it’s go­ing to cost to buy the car of their dreams. Here’s an ex­am­ple: Prospec­tive buy­ers of a Honda Pilot in­tended to fi­nance the pur­chase and didn’t want to put any money down. They didn’t want to hear about monthly pay­ments ei­ther; they just wanted to get the low­est pos­si­ble out-the-door price (af­ter all fees and taxes). They agreed on an out-the-door price of $35,000 and the sales­per­son got started on the pa­per­work. But when they saw the $610 pay­ment that goes along with a 60-month loan for $35,000 at 1.9 per­cent an­nual per­cent­age rate (APR), they were stunned. They had no idea the pay­ment “for a Honda” could be so high. That $610 monthly pay­ment was too much for their bud­get, and it looked like the deal was off. Be­fore they left, though, the sales­per­son of­fered them a lease. Same SUV and no down pay­ment, but with a monthly pay­ment that was far less. Af­ter think­ing it over for a few min­utes, they signed the deal.

2. Ex­pen­sive used-car fi­nanc­ing

Here’s the sce­nario: A shop­per walks into a deal­er­ship in­tend­ing to fi­nance a used car in the $10,000 price range with the goal of get­ting a low monthly pay­ment. In­stead, she ends up leas­ing a new car. What hap­pened? It’s the re­sult of how banks han­dle used-car loans. Some banks won’t of­fer 60-month loans on older cars or cars with lots of miles on the odome­ter. Such cars also might not qual­ify for stan­dard fi­nanc­ing terms or a low APR. A shop­per wants a $10,000 loan for 60 months with a 4 per­cent APR, which re­sults in a $184 monthly pay­ment. What the bank will ap­prove, how­ever, is a $10,000 loan for 36 months at 11 per­cent APR. That re­sults in a $327 monthly pay­ment. Not what she had in mind. En­ter the lease: She could lease a 2017 Toy­ota Corolla for three years, pay­ing $159 a month and $1,999 at sign­ing. Com­pare that to $327 a month on an 8-year-old Toy­ota Corolla with 100K on the odome­ter. Even if she pre­ferred to buy used and might want to own that car free and clear in a few years, the prospect of a brand-new, un­der-war­ranty car with low monthly lease pay­ments might carry the day.

3. To cure be­ing ‘up­side down’

More shop­pers than ever are up­side down on their car loans, mean­ing they owe more on the loan than the car is worth. If you owe $10,000 on a ve­hi­cle that’s worth $8,000, you’re $2,000 up­side down. A third of car shop­pers who traded in their old cars as they bought new ones in 2016 had av­er­age neg­a­tive equity of $4,913, ac­cord­ing to Ed­munds re­search. Un­less a shop­per starts a new deal with a down pay­ment that’s big enough to cover that neg­a­tive equity, he will need to fold the bal­ance into the sell­ing price of the new ve­hi­cle. That, of course, makes it even more ex­pen­sive. A lease can flip the pic­ture for a car owner who is up­side down. Here’s an ex­am­ple, based on a real 2016 “mys­tery shop­per” ex­per­i­ment Ed­munds con­ducted. The shop­per con­tacted a large Honda deal­er­ship in search of a new 2016 Honda Odyssey. He re­ported that he had ex­cel­lent credit and wanted to put $3,000 down. Un­for­tu­nately, the shop­per said, he also was $4,800 up­side down on his cur­rent car. To make the deal, he planned to trade in his car, put $3,000 down, and fold the $4,800 he still owed into the fi­nanc­ing for the Odyssey.

The deal­er­ship laid out these pos­si­ble pur­chase terms: On a 48-month car loan, the pay­ments would be a steep $711 a month. For a 60-month loan, the pay­ment was bet­ter but still high: $572 a month. It would have taken a 72-month loan to get the pay­ments to a more palat­able $493 a month. Leas­ing was a dif­fer­ent story: With the same $3,000 out of pocket, the 36-month lease would only cost him $438 per month. And the neg­a­tive equity would go away. Leas­ing isn’t a cure for high monthly pay­ments or up­side-down car loans. Leas­ing’s mileage lim­its can put a damper on spon­ta­neous road trips. Ex­cess dam­age charges loom over ev­ery spilled soft drink or park­ing-lot ding. And in the long run, leas­ing cars over and over will cost more money than buy­ing a new or used car and keep­ing it. —AP

This photo pro­vided by Toy­ota shows the 2017 Toy­ota Corolla, an ex­am­ple of a car that could be less ex­pen­sive to lease new than to buy used. —AP

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