By Herb Weisbaum ConsumerMan
msnbc.com contributor
updated 10/31/2007 8:40:42 PM ET 2007-11-01T00:40:42

My brother and I think alike about most financial matters. But when it comes to cars, we take very different roads. I always buy. Stan always leases.

He likes the lower monthly payments and wants to drive a new car every three years. I keep my cars 10 to 12 years. I get years of transportation with no car payments and own something of value, a trade-in, when I’m ready to get a new car.

For me, the lease transaction is way too complicated. I also dislike the idea of back-end fees if I drive too many miles or have what the dealer considers to be excess wear and tear.

Like my brother, a lot of people find leasing very attractive. Over the last few years, leasing has made a big comeback. According to Edmunds.com about 18 percent of all cars will leave the lot on a lease this year.

With money tight, leasing looks very attractive right now. Those lower monthly payments make it possible for some people to drive a more expensive model than they could afford to buy. By leasing they usually pay more in the long run, but they may not know it.

The editors of Consumer Reports Money Advisor did the math and concluded that leasing “is almost always less economical than financing the same vehicle.”

Remember, with a lease you’re just renting that vehicle for a set amount of time. When you buy, it’s yours once you make the last payment. “You have an asset that has some real value,” says Robert Krughoff, president of Checkbook magazine. “Yes, you do pay more per month to end up with that value, but at the back end you really do have something.”

The language
Leasing has its own language, terminology that can be confusing because it’s unfamiliar. With a lease the price of the vehicle is called the “capitalization cost” and the interest is referred to as the “money factor.”

When buying a car, you can compare loan rates with one simple number, the APR or annual percentage rate. With leasing there is no such number. “There is no way to tell if you are getting a good deal or a bad deal unless you use a spreadsheet,” says Seattle attorney Peter Maier, who specializes in cases dealing with auto problems.

Maier is not very keen on leasing. “Any time a transaction gets more complicated, the chances go up that you’ll get taken,” he says. “There are just umpteen subtle ways for a dealer to take advantage of you, or things you may not consider, when signing the lease.”

“Leasing is dangerous if you don’t know what you’re doing,” says Doug Walsh, who runs the consumer protection division of the Washington State attorney general’s office. Walsh has been dealing with car issues since 1990, so he knows all the tricks of the trade.

Most people are not familiar with leasing, he says. They don’t realize that the disclosures are different and the way the transaction is negotiated is different. Most people focus on the monthly payment, rather than negotiating the best price. Do that, Walsh says, and you’ll be giving the dealership “a ton of profit and not even know it.”

You need to focus on three things, he says: the capitalized cost or price of the vehicle, the residual value or what it will be worth at the end of the lease, and the money factor or interest you’ll pay to finance the deal.

Negotiate hard on that capitalized cost, just as you would haggle over the sales price if you were buying the vehicle. Walsh believes a fair capitalized cost is no more than the manufacturers' suggested retail price. Then deduct the down payment (or capitalized cost reduction as they call it), your trade-in and any rebate.

The residual value is fixed and non-negotiable. It’s based on what the leasing company has determined the value of that vehicle will be at the end of the lease.

The money factor, which is negotiable, should be competitive with market rates for car loans. You can find online calculators that let you compare rates. Keep this in mind: A dealer is not required to tell you what interest rate you will pay to lease that vehicle. Federal law only requires that information be disclosed with a purchase.

Here are some dos and don'ts of leasing:

Look for a vehicle that holds its value. Cars and trucks with a high resale value are better lease options because their residual value (what they’re worth at the end of the deal) is higher. That means you are financing less depreciation during the term of the lease. Check Consumer Reports, Edmunds.com or Kelly Blue Book to see which vehicles hold their value the best.

Go short. Long-term leases are risky. If for some reason you decide that vehicle is not for you, you can’t just walk away from the lease. You’ll pay a stiff penalty to terminate early. Most consumer experts recommend a three-year lease.

Check the mileage allowance. You want a mileage allowance that is going to be slightly higher than what you will drive each year of the lease. You’ll pay 15 to 30 cents a mile for each mile you go over the limit. If you can’t predict how much driving you’ll do in the next three years, you probably don’t want to lease.

Check the math. Doug Walsh tells me dealers prefer to lease cars, “because they can hide your cash, trade-in, and rebate on these complex line items on the lease agreement. You need to make sure the dealer hasn’t “creamed off” those savings by bumping up the capitalized cost or adding high cost extras, such as a service contract that doesn’t kick in until after the lease ends. Before you sign, verify all the numbers and understand all the terms.

Take the lease to full term. Months before your lease expires, the dealer or manufacturer may encourage you to “trade-in” that car for a new one.

“If you do, you’re going to take a bath,” says Doug Walsh. “The dealer cannot forgive those payments. They’re going to get paid, and you’re going to pay them whether you realize it or not.” Those leftover payments will just get rolled into the price of the next vehicle. Early termination is always extraordinarily expensive.

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