Thursday, August 28, 2014
Inquirer Daily News

Modern-Day Classic: 2006-2008 Dodge Magnum SRT8

Leasing is back as a popular way to drive new wheels. According to the credit experts at Experian, roughly 27 percent of 2013 new-car transactions were leases. 

Most people who lease like the idea of lower monthly payments, as well as shorter contract periods -- often 24 to 36 months -- after which, in theory, they simply return the car and walk away.

Although somewhat like renting a house or apartment, leasing a car is more complicated. Terms such as "residual value," "capitalized cost" and "acquisition fees" litter the car-leasing landscape. Often the advertised monthly payment is only part of the real cost. An unbelievably low monthly payment could mean extra costs buried deep in the mouse print.

On Honda.com, we found a lease for a 2014 Odyssey LX with an MSRP of $29,655 including a destination charge of $269 per month for 36 months with $2,499 down at signing. This excludes taxes, titles and dealer fees.

After haggling the price to a respectable $27,950, making the same down payment and financing the balance for 60 months at a 3 percent interest rate (the average for a 60-month loan at the time, according to Bankrate.com), you can purchase the same Odyssey with a monthly payment of $457.

Not much math is required to show that $269 is a lot less than $457, right? Of course, at the end of the 36-month lease, you would return the Odyssey, which you would own at the end of the 60-month loan.

But that lower monthly payment may not represent all the real and potential costs of a lease. Other factors can influence just how good a lease deal is.

Down Payment or Open-End Balloon Payment

Leasing is simply paying for the value of a car the leasing company predicts you will consume during the term of the lease. A $30,000 car that the leasing company projects will be worth $18,000 at the end of a 36-month lease will cost you $12,000 divided by 36, plus interest per month.

But to make an advertised lease payment more attractive, lenders often require a down payment. A larger down payment equals a lower monthly payment. With a down payment of $2,000, the monthly payment would be $10,000 divided by 36. In the end, you pay as much for the car, but the advertised monthly payment is less by about $56.

Furthermore, if the car is stolen or totaled two months into the lease, that down payment will just be lost.

Steer clear of any lease based on paying the difference between the lender's projection and the car's actual market value at lease end. This is called an open-end lease, and it can stick you with a final balloon payment of hundreds or even thousands of dollars. A low monthly payment doesn't mean much when you have to stroke out a big check when returning the car.

Disposition Fee/Purchase Option Fee

Dropping off a car at lease end without leasing a new one may require a disposition fee. It can run as much as $500. Let's say it's $350. Divided by 36 months, it would work out to nearly another $10 a month. On the other hand, deciding to buy the car at lease end may require a purchase option fee that also can run into hundreds of extra dollars.

Excess Mileage Fee

Every lease contract includes a mileage limit, over which the lender will charge by the mile. In the case of our Odyssey, the limit is 12,000 miles annually or an average of 33 miles per day. Many people commute farther than that to and from work. In fact, the annual average is about 15,000 miles per year. In the case of the Odyssey, the penalty is 15 cents per mile. Applying the penalty to 3,000 miles works out to $450, or the equivalent of roughly $12.50 per month.

Insurance

According to carinsurance.com, leasing a car requires more insurance than conventional financing. Higher coverage amounts and deductibles demanded by leasing companies drive up the insurance costs -- sometimes by thousands of dollars. Before signing a lease, establish the coverage required and check with your insurance agent to determine any extra costs. Divide those extra costs by the number of months in your lease.

Termination Fee

Returning a car before the lease expires almost always prompts a penalty. It can be hundreds or thousands of dollars. Websites such as swapalease.com and leasetrader.com can erase or lessen the pain of early termination; otherwise, a termination fee will drive up the cost. Ensure any lease you sign allows transferring the car to a qualified party.

Leasing always costs more than the advertised monthly payment. How much more depends on the lease. Always check the small print.

Tommy Flanagan