Issue Date: September 8, 2002
Cars: Lease or buy?
Take a 4-question quiz to see which is right for you: Monthly payments are a third higher for car buyers than for leasers.
If you're in the market for a new car, you're in luck. The pressure on dealers to clear their 2002 inventory is beginning, says Paul Taylor, chief economist of the National Automobile Dealers Association.
You're seeing it in the slew of 0% financing deals that have reappeared for buyers. As an added plus, the fact that interest rates remain historically low makes this a good time to lease a new set of wheels.
The big question: Will you lease or buy?
Interestingly, leasers and buyers use vehicles in the same way, says Art Spinella of CNW Marketing Research in Bandon, Ore. Despite the hubbub about mileage caps on leased cars, they are driven about the same amount and for the same purposes (commuting, errands, etc.) as cars that are bought.
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So, are you among the two-thirds who are meant to be buyers or the remaining third who ought to lease? Start by answering the following four questions:
Are you looking for a fashion statement? Roughly one-third of people who lease do it to get a better car for the same monthly payment. They can lease a Lexus for roughly the same amount each month they would pay to purchase a Toyota.
Do you want to save out-of-pocket expenses? No matter which car you choose, your monthly payment will be about one-third more if you buy than if you lease. Of course, when buyers are finished making payments, they own the car, free and clear. Leasers must give it back (or buy out the rest of the lease, if they decide to keep the car).
Are you a first-time user of this particular type of vehicle? If you've been a sedan driver as long as you've had your license, there's a chance -- despite a stellar test drive -- that an SUV (or minivan or sports car) won't be the vehicle for you. A three-year lease to test the waters might be smart.
Will you keep the car more than three or four years? If so, leasing doesn't make sense; after the warranty lapses, you may end up putting money into a car you don't own. Buying makes more sense: The longer you keep the car, the better your deal becomes. "The reality is, you can't build equity in a depreciating asset," Spinella says. "The only people who truly have an advantage [in car deals] are the ones who use it all up."
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How to get a good deal
Now that you know whether you're leasing or buying, let's talk about how to get a good deal.
If you buy: The first thing you need to do is negotiate a fair price on the car. Visit a site like eloan.com to ballpark a price, and see what financing you can arrange online; set that aside for later. Also pull the invoice price from the Internet -- it's widely available -- and use that as your opening offer, suggests Michael Kranitz, who runs CarWizard.com and other car-related sites. Your salesman will take your offer to the manager, come back and counter with a price, say, $1,500 higher. Eventually, you split the difference. And here's where the real negotiating starts. If you really want the lowest price, Kranitz says, you'll tell the salesman you're walking unless he can do $300 to $500 better than that. "The problem with most people," he says, "is they don't have the patience to find out" what the best deal really can be.
After you have reached your price, talk financing. Refer to the online financing information you gathered earlier; compare it with what the dealer is offering now. If the dealer has made an extremely low offer -- 2% to 4% -- the manufacturer probably is running a financing incentive, and it'll be tough to beat.
If you lease: Nine out of 10 times, you'll get financing at the dealer. The key thing to remember is that the dealer has many lenders to offer, not just the single one he may present to you. He often chooses to offer you the one that gives him the biggest profit (or the one, Kranitz notes, that gave him tickets to last week's big game). So see everything that's available.
Making matters worse, car leases include a series of obscure numbers that figure into the monthly payment.
To assess whether a particular lease deal is good, do two things:
One, shop like crazy. By taking your first offer as a starting point and asking other dealers to beat it, you can back your way into a decent deal.
Two, spend $12 at LeaseWizard.com. You'll get six different financing quotes on the car, complete with "money factors" (leasing lingo for what is essentially the interest rate), residuals (the predicted value of the vehicle at the end of the lease term) and bank fees. The best quotes have low money factors and high residuals; they'll result in the lowest monthly payment.
Then, when you see what your dealer is offering, you can compare apples to apples. Notes Kranitz: "If the money factor and residual are equal or better than the best deal on the sheet, you got a great deal. If you're just in the ballpark, maybe you need to shop more."
Contributing Editor Jean Sherman Chatzky is the author of "Talking Money" (Warner Books, $24.95). Additional reporting by Brian B. Reid.
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