For most agents, automobile expense is one of their very highest. The purpose of this
article is to make the buyer be aware of the options in filling the need of their
automobile. There are only three ways to pay for this privilege of having an automobile:
1. The most expensive way is to buy, financing over a period of years.
2. The second most expensive way is to pay cash.
3. The least expensive way, especially with luxury cars, is to lease. This is based on
the assumption that one drives less than 18,000 to 20,000 miles per year.
Let us start by assuming a person buys a luxury car that sells for approximately $37,000
or $38,000, for a cash amount of only $33,000. Presently, in America, in order to get a
new car every two years, the additional cost is approximately $15,000, or $7,500 each
year. A lease in this example would save approximately $1,500 or more each year.
If one pays a downpayment and finances over two or more years, there are, of course,
added finance charges.
On the average, leasing a luxury car in the above price range is approximately $499 per
month, with a security deposit required of approximately $1,500 on the first lease only.
As on renewals, for leases on each new car, the original deposit is sufficient.
For a mid-sized car like the Mercury Sable, or a Chevy Impala, or an Olds ’88, the lease
for 24 months would be approximately $375 per month, and yet to purchase a new
$20,000 to $24,000 car every two years, the difference would be over $5,000 per year.
A less expensive car that can be bought for $17,000 to $18,000 could be leased for
approximately $275 per month, and yet the difference for a new car of this size would be
a minimum of $8,000 to $9,000 every two years.
In 1993, nearly a quarter of all cars sold in the United States were leased, and experts
predict the number could reach 50 percent within the next five years. Why? Because,
leasing often makes more sense than buying, and one should at least check the difference.
The principle advantages of leasing are a low downpayment, low monthly payments, and
a bigger tax write-off if you use your car for business. The disadvantages—no equity
build-up and little flexibility during the term of the lease.
When leasing, concentrate on the three factors that determine the payment—the car’s
price, the residual value, and the length of the lease. When you lease, the leasing
company buys the vehicle, and then allows you to use it. Your monthly payments will
cover interest on the cost of the car, and the difference between the purchase price and
the residual value; in other words, the depreciated value. The smaller you make the
spread between the purchase price and the residual value, the less your lease payments
will be each month.
The more months you spread the lease out, the lower the monthly payment, but your
normal upkeep will increase as your car gets older.
If you are certain you don’t want to buy the car when your lease is up, an inflated
residual is your friend. Spend some time on the model you are interested in so you have
an idea on prices. There are companies such as the Automotive Lease Guide (805-965-
1403) that give definitive sources for projected value of almost all models. The book,
which is updated nine times a year, costs $9.00 per copy, and shows costs and residual
values. Concentrate on getting the best price, and watch out for dealers luring you with
low base prices, and then selling you options. Shop—Shop—Shop!
Which is the better—buying or leasing? The preference is yours, but some things to
consider:
1. How much do you drive? The ideal lease customer drives 15,000 miles a year or
less, and maintains a car in good condition. If you drive substantially more, and still want
to lease, you should negotiate the cost of additional miles up front.
2. Do you use your car for business purposes? If you are deducting a portion of your
car’s depreciation from your taxes, you will be able to deduct substantially more if you
lease. The IRS places a cap on the depreciation of a car when you buy, but there is no cap
if you lease.
3. Can you do better with your cash? If so, leasing makes sense. In many cases, you
have to come up with only $1,000 or $2,000 for fees and the first payment. If you buy a
car and finance it, with downpayment, sales tax, and other payments, the initial cost
could be $3,000 to $4,000 on an $18,000 car.
4. How often do you want a new car? If you want a new car every two to three
years, leasing saves you the hassle of selling your old car, and allows you to move from
car to car. If you want a new car every year, leasing doesn’t pay. Or, if you keep a car 7
or 8 years, buying will save you money.
You are on your own, but it certainly is worth checking!
*All prices listed above are from the time that the manual was originally published*
