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QUINCY, MASS., March 26 (THE PATRIOT LEDGER) — Used-auto leasing has surged over the past decade, although many consumers are unaware of leasing's availability and advantages. Only about 46,000 used cars were leased in 1990, according to Bandon, Ore.-based CNW Marketing/Research. The number increased to 281,000 in 1995 and 392,000 in 1997. And last year ... used-car leases jumped to 607,000. Analysts say the number would be even larger if consumers were more aware. Less than 10% of consumers purchasing a used auto are aware of leasing options, compared with 72% of new-auto buyers. |
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veryone's heard about leasing new cars. But did you know that leasing a used car may be
a sensible way to acquire a newer set of wheels—if you're very careful? Do it right, and
for a relatively small amount of money you'll be able to drive a bigger and nicer vehicle
than you could afford to lease new.
The bad news: But lease a used car the wrong way, and you'll probably pay lots more to lease a used car than you would to buy the same car brand-new. Why used-car leases should be cheaper than new-car leases: The cost of an auto lease (new or used) is dramatically affected by the amount the vehicle is worth when your lease ends. And new cars drop in value very quickly, particularly during the first two years. New-car leases reflect that drop in value by charging you more per month. Used cars, on the other hand, generally don't depreciate as much—particularly during the third, fourth, and fifth years. For example, a $20,000 new car might depreciate 40% in two years. After two years, that $20,000 car would be worth only $12,000 wholesale. (Wholesale is what a dealer says a vehicle is worth before marking it up to sell it retail to you.) Lease that new car for two years and you pay for all that depreciation. But that same car's drop in value generally slows down dramatically during the third, fourth, and fifth years. A car's value for the first five years of its life might look like this:
Do you notice how the value stays relatively stable as the car ages? That's what—potentially—makes used-car leasing so attractive. |
Some lease companies might try to lease you a two-year-old $12,000 car for $20,000— what it cost new. |
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Go slow, don't be pushed, be objective, and don't be afraid to walk away if any part of the lease negotiation makes you uncomfortable. |
Do your homework & shop smart There's just one big problem, however: Leasing companies don't want to lease you a two-year-old car based on its wholesale value. Taking our example, they wouldn't want to lease you a two-year-old car for a lease payment based on $12,000. They want to lease it to you for the highest possible retail price. Some lease companies even might try to lease you that two-year-old $12,000 car for $20,000—what it cost new. And there are other problems, too, nearly as big. But the bottom line is this: Follow these guidelines and you probably will drive a fine vehicle for a lot fewer dollars. |
| Doing it the right way 1. Decide if you should lease. If you're having budget problems, if you don't like making payments forever, and/or if you like to keep a car until it turns to dust, don't lease—new or used. Leases are hard to break (that's trouble if you're having credit problems and want to get rid of the car). They also always leave you walking at the end of the lease term because you're really "renting" the car for a specific period rather than owning it. At the end of a lease, you'll always need to lease or buy another set of wheels. 2. Budget a monthly payment. What are you paying right now each month? Can you afford to pay more? Do you need to pay less? Do some simple budgeting. The people at your credit union can give you easy budget guidelines. 3. Locate two good sources for late-model used cars. Two sources are important to introduce a bit of competition for your business. New-car dealerships, rental agency used-car operations, and used-car superstores are a good bet. Virtually all of these sources will offer used-car leases, too. Then find one car at each source that interests you. Don't look at cars more than three years old and don't look at cars with high mileage—more than 20,000 miles per year. 4. Let the age of the car determine how many months you lease. After five years, most cars begin to have major problems. Therefore don't enter into any lease that has you driving a used car that's more than five years old. If the car you like is one year old, don't lease for more than four years maximum. If it's two years old, don't lease for more than three years, and so on. 5. Learn the "average wholesale value" and "average retail value" of the two cars you've chosen. Because used cars don't have a fixed retail value, leasing companies, as I said, can price them as high as they want. And, to make matters worse, leasing companies generally don't tell you what you're paying for the car—all they have to do is tell you the monthly payment and a vague figure called "capitalized cost." You'll see that figure on your lease. So, how do you know what to pay? Make sure the "capitalized cost" is closer to the "wholesale value" than to the "retail value." If the average wholesale value of a car you like is $15,000 and the retail value is $17,000, for instance, do your best to negotiate the capitalized cost down to the $15,000 figure. 6. Never accept the leasing company's first payment offer. At leasing companies, even the time of day is negotiable. But leasing companies don't want you to know that. Especially since negotiating a lease really is easier than negotiating a purchase: Just offer at least 25% less per month than the leasing company wants you to pay. And if the folks there don't like that, remind them that you've found another car and another leasing company that you like just as much as theirs. 7. Be careful with your trade-in. Some companies, unfortunately, just love to "steal" your trade—either give you nothing for it or give you less than its true wholesale value. Protect yourself by knowing its true wholesale value before you trade it. Drive it to three or four used-car operations and tell them you're thinking about selling it. Your highest firm offer probably is its wholesale value. You can get an idea of value on-line from the Kelley Blue Book. Then make sure the leasing company's lease actually lists at least that amount, minus anything you owe, as the value of your trade. Your lease should show a trade-in line. If it doesn't, and if the leasing company refuses to list the net value of your trade on the lease, get out of there. Find a better leasing company. 8. Take your time. The leasing industry is incredibly competitive these days. Go slow, don't be pushed, be objective, and don't be afraid to walk away if any part of the lease negotiation makes you uncomfortable. Having trouble evaluating the offer? Ask the people at your credit union to crunch the numbers with you. Leasing a used car can be a smart move for careful consumers. If you're willing to do your homework, you may be able to drive more car for less money. Remar Sutton's car-buying tips have been featured on "Good Morning America," "Today," "20/20," "Nightline," and in magazines such as People, Newsweek, and Credit Union Magazine. |
If you're having budget problems, if you don't like making payments forever, and/or if you like to keep a car until it turns to dust, don't lease— new or used. 
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| ©1999 Credit Union National Association Inc. |