DOES LEASING MAKE MORE SENSE than buying a new car?
Absolutely, say experts. That is, under certain conditions. Actually, it depends what you’re going to use the car for. And what you’re buying. And how you negotiate] And what size ego you tend to put on in the morning.
To get to the heart of the matter, we asked Alan Goldfarb, Dallas certified financial planner, as well as David Stitt, CFP, CPA, of Preston Center, and a Dallas tax attorney (\|/ho prefers to go unnamed) some basic questions about the merits of the two payment options. Here’s what they said:
WHAT ARE SOME OF THE BASIC ADVANTAGES OF LEASING?
Stitt: You have lower payments, you can drive a more expensive vehicle for less money, and at the end of two, three, or four years you, can just walk away.
WHAT ARE SOME BASIC DISADVANTAGES OF LEASING?
Stitt: Leases art hard to get out of-there are significant early termination penalties. Also, you have no equity in the vehicle. You don’t own anything.
WHY DO DEALERS LIKE LEASES?
Stitt: Dealers like leases because people don’t know yon can negotiate leases. And leases bring people back into the dealership every couple years, creating repeat customers.
Goldfarb: Part of the reason leasing has become so popular in the last few years is that it sells more new cars. People are convinced that they want to turn back cars every few years.
Stitt: A dealer will never complain about a lease. They’ll have a higher profit on a lease than on a purchase.
IN GENERAL, WHEN DO LEASES TEND TO MAKE FINANCIAL SENSE?
Stitt: Most people just look at their monthly payments. That’s a mistake. Leasing is generally better if you are the kind of person who drives a vehicle for only three or four years; if the automobile dealer is supporting both the interest rate and the residual value; if the vehicle is used more than 50 percent for business; and if it is a luxury vehicle.
Goldfarb: There are a lot of factors you have to look at. For example, if you drive very few miles, maybe a lease isn’t good for you. The average miles per year you may be expected to drive for a lease is probably about 12,000. If you only drive 5,000 a year, you’re a loser.
ARE THERE ANY TAX ADVANTAGES IN LEASING A CAR?
Tax attorney: As nearly as I can tell, there are no tax advantages in leasing a car. Leasing is just another way of financing, and in my experience, the implicit rate is higher than what is obtainable at the bank. Also, when you lease, you pay ad valorem lax to all of the local tax authorities, whereas if you own, you only pay to Dallas. If the vehicle is to be used in a trade or business, the equation changes somewhat because financing charges and depreciation then become deductible. Stitt: Some operating costs are deductible whether you own or lease. When you own, you recover through depreciation. But depreciation is limited on luxury cars (those with a value over $ 15,700). When you lease, you can write off lease payments and deduct business percentages.
WHAT’S THE BIGGEST MISTAKE PEOPLE MAKE IN LEASING?
Stitt: People want to make leasing the easy way out of buying. They want to just sign the paperwork and later bring the car back. That’s how they end up paying more for the vehicle than they need to.
Goldfarb: A lot of times people tend to pay more for the car than they would if they were negotiating a purchase. If you’re in the market for a car, you definitely want to first pick the car you want, then negotiate the price, then talk trade-in. The last thing you should negotiate is the interest rate or lease rate.
HOW MUCH OF LEASING INVOLVES EGO?
Stitt: Everyone wants a bright, shiny new car. The more expensive vehicles you see on the streets-the likelihood of those being leased is greater.
Goldfarb: More luxury car owners are short-term owners, and less money is tied up in a lease. If you want the most attractive car for the least money, a lease may be your best deal. But that’s more of an emotional decision than a financial one.