At the turnover of the model year, car dealers of all stripes roll out ads for cut-rate leases as they try to clear out old inventory. As tempting as these low lease rates may sound, even the best lease deals don't save money, according to a recent analysis of several local ads.
We broke down the numbers behind several recent online and newspaper advertisements for 2012 models, including the Toyota RAV4, Subaru Outback, and Mini Cooper Countryman. What we found is that although these models had attractive deals offered, the long-term implications of getting on the lease train were more expensive than buying, and it is a ride that is hard to get off.
This is the first in a series of blogs where we'll cover our general buying advice, then walk through our studied examples to illustrate in detail the cost implications. Of course, through doing this, we recognize that for many car shoppers, leasing has unique appeal, whether is it the predictable, short-term nature or the ease for writing off a business expense. For this exercise, our focus will be on the traditional car buyer who is looking to limit costs, and we'll show the benefits of looking long term.
Looking beyond the ads to your checkbook
The head-turning lease deals that grab attention in print, radio, and television advertising this time of year tend to be heavily subsidized, enabling very low lease payments. The motivation for the manufacturer and local dealerships is to clear last model-year's inventory, to make room for the hot-new models now arriving at showrooms. With these offers, the monthly payments are low because you only pay for depreciation on the car, not for its full value, and the amount of predicted depreciation has been reduced to lower the cost to the customer.
What the ads don't tell you, of course, is that after years of making these low payments, covering the most expensive years of a car's life, you still don't own a car. And since you have no trade-in equity, you're left going back to the dealership for another lease, making payments on the most expensive years on another car, without a trade-in car handy to cover the initial cost reduction--a required upfront cost found in the small print to get the affordable monthly payment. (In our examples, the upfront costs were about $2,000-$3,500.) Once on the lease cycle, this scenario repeats until you can come up with enough money to make a down payment big enough to afford to buy a car. In the meantime, you're providing a steady flow of low-mileage cars for the dealership to sell, likely at a greater profit than on new cars. No wonder car dealers love leases.
In many cases, we found that while initial leases on these models seem like very good deals, these offers mainly serve to entice you back into the dealership in just a few years to lease another car that likely won't be such a bargain. By then, the new version will be in the heart of its life cycle and dealers won't be offering fire sales to make way for new ones. Timing is everything, and timing can become harder to manage when it is a lease contract that determines it, especially with odd term lengths such as 39 or 42 months.
And in truth, whether you're buying or leasing a car, it's often hard to get the good deals found in newspaper ads, because they apply only to one or two examples in dealer stock and tend to sell quickly. Still, car dealers are legally bound to abide by the terms of their advertisements, so we thought it would be a good idea to see just how good those terms are.
So, good deals can be had. But, the better deal long-term is to buy a reliable car and hold on to it. We'll dig in to specific examples tomorrow with our next post.