How a Lease Trick Can Force You to Buy the Wrong Car
NEW YORK ( TheStreet) -- Car leasing is hot, accounting for a record 27.6% of new-car acquisitions in the second quarter, up from 17.7% three years ago, according to Experian Automotive . But what will that new vehicle be worth when the lease ends?
It's a key question, because at that point the driver has the option of turning the vehicle in and leasing or buying another, or buying it for the "residual" value set when the lease began. If the residual value is set too high, buying the car won't make sense, and the driver will have little choice but to pay a new-car price when the lease ends three, four or five years down the road.
Leases are attractive today because dealers are offering unusually low payments, making it much easier to bear the monthly cost of a lease versus a purchase. Of course, it's important to make an apples-to-apples comparison -- payments on a three-year lease versus a three-year purchase, for instance.
But there's a problem. Some reports say dealers are offsetting the lower lease payments by setting higher residual values, making vehicles more expensive to buy when the lease ends.
Edmunds, the vehicle-information service, urges shoppers to look closely at the residual value and other elements of the deal. A "purchase option fee," for instance, could add several hundred dollars to the price.
Then, as the expiration of the lease is approaching, look up the vehicle's market value. Edmunds recommends using the private-party figure for true market value rather than the turn-in value, which is usually lower. Both are found on the Edmunds site. Kelley Blue Book has a similar service.
"The general rule of thumb is if the residual value is less than Edmunds.com's private-party true market value price of the car, then the buyout is a good deal," says Edmunds' senior consumer advice editor, Philip Reed.
You can use a Buy or Lease? calculator to help make sense of the numbers.
Unfortunately, you don't know today what the market value will be years from now. High demand is keeping used car values unusually high. Put another way, car depreciation, or the decline in value as a car ages, is unusually low. But you don't know if this will still be the case when your lease ends. So in using the calculator it's best to play with various assumptions.
You can get some insight on used-car values on the Edmunds and Kelly sites, which provide depreciation data on various makes and models, but those data look backward, not forward.