Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 11, 1990 TAG: 9006140457
SECTION: BUSINESS PAGE: B-5 EDITION: METRO
SOURCE: Mag Poff/Business writer
DATELINE: LENGTH: Medium
Are you one of those people who trade in for a new car every three or four years?
Perhaps you feel tempted to finance a car over a period of five years even though you know that's a bad financial move.
Or maybe you want to drive a better car than you can afford to buy.
If any or alll of the above are true about you, then perhaps you are a candidate for another option: leasing a car.
Although many businesses lease their vehicles, that alternative is not yet popular among individual drivers.
Preston Collins, sales manager at Valley Cadillac Oldsmobile, estimates that about 20 percent of people nationwide chose to lease. In Virginia, he said, the share is probably 10 percent.
Charles Robertson Jr., executive vice president of Magic City Ford, said leasing is catching on primarily in large metropolitan areas.
Hayward Statum, owner of Friendly Lincoln Mercury in Salem, said the trend is growing here as well.
All three dealerships sell cars as well as lease them.
Statum said leasing avoids tying up your personal funds, and, because most contracts are short term, spares you the expense of major repairs on aging cars.
If you drive a car five or more years, Statum said, buying is the best bet.
He predicted that one day leasing will account for 50 to 70 percent of his business.
That's because car ownership is a myth, he said.
Most people finance for 60 months, so they always owe more than the car is worth. And they trade before they pay for the car.
The result, he said, is that most people end up like lessees - trading for a new car without any equity.
Leasing is a tool to get more options on a car, according to Statum. For the same monthly payment, you can either buy a car without the sun roof you want or lease a car with that feature.
Robertson of Magic City Ford said car makers encourage leasing in order to shorten the trading cycle.
When loans lengthened to 60 months, he said, owners tend to keep their cars th full five years because they have reverse equity.
Most leases are for 48 or fewer months, Robertson said, so cars turn over faster.
Individuals, on the other hand, like the lower monthly payments that leasing offers.
People may be better off leasing for 36 or 48 months than they would be buying over 60 months, Robertson said.
Collins of Valley Cadillac pointed out that tax deductions used to be a consideration in ownership. But only 10 percent of interest on a car loan can be taken this year and none next year.
Anyone who drives fewer than 10,000 miles a year should buy, Collins said.
Leases allow 12,000 or 15,000 miles a year with a surcharge for extra miles. Collins pointed out there's no offsetting credit for fewer miles.
He agreed that a three-year lease is the equivalent to 60-month purchase because there's no equity in either case.
Lessees walk away at the end of three years, he said, unless there's damage or extra mileage.
Collins said lessees should set realistic mileage in their contracts because extra miles add up to a substantial payment at the end.
(Anyone who drives an extra 5,000 miles a year at the current standard of 6 cents a mile would owe another $900 at the end of the term.)
Some people like leases because of simplicity in tracking costs, Collins said. One payment usually covers everything. He warned that anyone who signs a lease is locked into the deal for the term of the contract.
A buyer can trade out of a deal even if the terms are unfavorable. A leased car is not the buyer's to trade.
Collins said people who lease should always resist the temptation of locking into a five-year deal in order to obtain lower monthly payments.
Long-term contracts are an abuse in the industry, he said, because people can't get out of them.
Collins also thinks lessees should pay only for the amount of car they are using, not the residual value when they turn it in.
If you want to keep the car beyond the three years, he advised, buy it up front.
Even so, he said, specify at the beginning what the value of the car will be at the end of the contract.
In his 1990 Money Guide, Fortune Editor Marshall Loeb said leasing is for people who lack money for a down payment, don't want to tie up their cash or will keep a car for less than four years.
He said a $12,000 car with 20 percent down and financed at 11 percent will cost $248 a month for four years. Rent under a four-year lease would be $222.
But at the end, he pointed out, the buyer ownes the car. The lessee would have to pay $4,884 for the car he has.
Loeb said lessees should know the monthly payment, cost of insurance, mileage limits and length of the lease.
The advance deposit should be no more than one or two months' payments, he said, and a disposition fee at the end of the contract should be no more than $250.
He said buyers should insist on specifying the exact price for the option of buying at the end.
by CNB