When Leasing a Car, Avoid the Lemons

ByABC News via logo
April 6, 2006, 5:17 PM

April 7, 2006 — -- Interest rates are on the rise, and as a result many consumers choose to lease rather than buy cars to avoid costly loans. If that sounds like you, you've probably learned that leasing can be a complicated, confusing experience.

Automotive Web site Edmunds.com says the average interest rate for new car loans was 8 percent in March, up from 6.4 percent a year ago. Edmunds says last month more than 19 percent of new cars were leased rather than purchased -- the highest rate in five years.

Here's the thing about leasing -- it's like having to learn a foreign language to get a new car! The process is baffling. Leases often require a smaller down payment and easier monthly installments than buying. But that's not enough reason to lease. If you know you're the type who likes to change vehicles every few years, and you don't mind having a car payment at all times, then leasing could suit you. If you prefer to keep driving your car for a number of years after it's paid off, you should buy.

You probably see the ads on TV all the time: "Lease the sleek new sporty speedster for just $299 a month for 36 months!" A lot of people go for these deals, then get the car home and realize they have no idea how much they actually agreed to pay for the car. Car dealers often emphasize the monthly payment instead of the total cost because it sounds more manageable to buyers. But some leases are so bad that if they were purchases it would be like paying 30 percent interest on your car loan, then not getting to keep the car once you've paid it off.

If you learn nothing else about car leases, learn this: Before you lease, you should negotiate a price for the car the same way you would if you were buying it. (Don't even tell the dealer whether you plan to buy or lease.) That way, monthly lease payment is then based on the negotiated price. It shouldn't be some random number the dealer dreams up.

If you hate haggling, this may not be welcome news. But think of it this way: You could end up paying less than the $299-a-month advertised on TV. Monthly lease payments are calculated lots of different ways, but here's a simplified formula: You take the car's purchase price, minus what it will be worth at the end of the lease and divide by the number of months.