$199-a-month new car: Not always a deal

[alienlovechild 75]

It's an offer some of us won't be able to refuse: a new car for about half the average monthly payment of a new-car purchase.

And that's not for a junky little penalty box but instead a well-equipped, mainstream midsize sedan such as the Honda Accord, Toyota Camry, Nissan Altima or Chevrolet Malibu. The magic number these days seems to be $199 a month, plus tax and license and whatever money the dealer demands upfront, usually about $2,200 (sometimes less or even much less). The ads are relentless, the cars attractive and the deals subsidized with the automakers' own dollars, so what's not to love?

Why leasing died -- and why it's back

Leasing fell off a cliff as automakers and banks found themselves stuck with fleets of 3-year-old full-size SUVs coming off leases just as gas prices were climbing over 4 bucks a gallon in 2008. For example, according to The New York Times, Ford took a $2.1 billion charge against earnings in 2008 to cover the declining value of large SUVs that were coming off leases. It had expected a 3-year-old SUV to retain about half its value; after the collapse, many SUVs were lucky to be worth 30% of their original sale prices.

Automakers are now returning to leasing, albeit reluctantly. Banks and automakers' finance arms are no longer eager to lend to anyone on the basis of a couple of paycheck stubs. Read the fine print on any of these deals and you'll see that they're reserved for customers with lofty "Super Preferred" or "Tier One +" credit scores. Forget to pay a monthly Visa bill two years ago? You may already be ineligible.

While new-car sales have been in the doldrums, near 30-year lows, the demand for clean, late-model used cars has been strong. With fewer cars coming off leases, the supply of those clean used cars has been restricted, driving up the price of used cars in general. With used-car prices going up, the residual values used to calculate leases have also risen, and that has reduced the cost of leasing. Thus the $199 midsize sedan.

And the $349-a-month luxury car. Though $199 a month seems to have become the sweet spot for mainstream models, aggressive leasing has moved into the luxury ranks as well. Cadillac, for instance, is offering a $499-a-month lease with just $1,000 down on its V6-powered CTS. BMW has special deals available on all its vehicles, including a 328i sedan for $349 a month after $4,924 at signing, and Mercedes-Benz has a lease deal on the C300 Sport Sedan for $349 a month with $4,143 due at signing.

It takes more than improved resale values to move $22,000 cars at $199 a month.

The lease deals often tell you how manufacturers are subsidizing them. It's common, for instance, for manufacturers to waive the security deposit that's usually part of a conventional lease. (Toyota does that on its current Camry lease offers.) Most of these deals also involve a "capitalized cost reduction," a slick name for a down payment. Because the car usually must come from a dealer's inventory, sometimes part of that capitalized cost reduction may in fact be a "suggested" contribution by the dealer. And finally, automakers can subsidize the interest rate, known in leasing circles as "the money factor."

For instance, according to CNW Research, new-car buyers say they plan to finance their cars for between three and four years (42.2 months on average). But they often leave with a loan that stretches out beyond five years (62.2 months on average).

Likewise, that $199 lease is on a low-key, well-equipped but hardly extravagant car equipped with a four-cylinder engine. If you go for the V6 and load up on options, the value that tempted you in the first place vanishes.

That $199 lease can also disappear if you have less than perfect credit. Depending on the standards of the particular manufacturer's financial division, the differences among a "Tier One +" credit customer, a "Tier One" customer and a "Tier Two" customer can be just a few dollars a month, or they can mean the deal isn't available to the lower scorers at all. And how customers are slotted into those tiers is up to the finance companies and their formulas. (You can quickly estimate the strength of your credit with this free quiz.)

Another pitfall: The featured leases from most manufacturers are structured around modest usage. For instance, Toyota's $199 Camry LE deal is good for 12,000 miles a year for three years. If your commute runs 40 miles a day, it's easy to exceed that limit. At the end of the lease period, it'll cost you 15 cents for every mile beyond the contracted 36,000. You should be able to negotiate a higher mileage allowance before entering the lease, but don't expect it to be free.

And, at the end of a lease, you turn in the car and walk away -- unless you've leased another car or called a cab. Buying a car may involve a larger down payment and cost more initially, but at the end of the finance term you'll have an asset that's worth something. At the end of a lease, you're lucky if you get a handshake.

Leasing isn't for everyone. But it is right for some people -- for example, those who understand that they are essentially renting a vehicle and that exiting a lease early is almost impossible. They don't drive for a living. They keep their cars in good shape. They understand the process, and they've done some legwork. If you want to join them, you should:

Know what your current car is worth. If you own your current car, research what it's worth before considering trading it in on a new vehicle. Selling it yourself may be a hassle, but it's likely to bring you more money. Consider the difference between what you'd get for the car yourself and what the dealer offers in trade as a convenience fee. How much is that convenience worth to you?

Shop for the money. Just because a deal sounds good doesn't mean better deals aren't out there. If you have a long-standing relationship with your local bank or credit union, it may have even better lease rates than dealers are offering. All it takes is a phone call or a visit to the institution's Web site to find out.

Shop for a dealer. Consider the manufacturers' leasing programs a good starting point. Many dealers, particularly those in large metro areas that compete with nearby dealers of the same brand, may sweeten their lease deals by, for example, dropping the acquisition price of the car to further lower payments. Don't just scan the manufacturers' Web sites; check out the dealers' sites, too. And don't be shy about calling around for the best deal.

Find the right car. A great deal on a car you hate is no deal at all. Know what you want, drive everything (if you can), and don't get hung up on only one car being the one that can make you happy. There's more information out there -- both on the Internet and in print -- for car shoppers than there is for any other consumer product. Use it.

Consider buying a certified used car. Certified used-car programs from manufacturers are popular for good reasons. The cars have been inspected, sometimes warranties are extended, and often manufacturers' "captive" finance arms offer better financing than what's available for private purchases through banks or credit unions. Plus, of course, while a new 2010 Honda Accord LX sedan is $22,565, a virtually identical, certified used 2008 Accord LX sedan with 33,000 miles on its clock should run $19,600, according to Kelley Blue Book. The new 2010 BMW 328i sedan starts at $34,025 while a certified used 2-year-old 328i that's gone 33,000 miles should run only about $27,600. (You can check certified pre-owned listings at AutoTrader.com.)

Don't buy or lease anything. Like your current car? If it's running well, why get rid of it? It's exciting to get a new vehicle, it's fun to drive around in something shiny and new, and there's something to be said for rewarding yourself for a lot of hard work. But if you want to save money, it's hard to beat driving a fully paid for, reliable car that needs to carry only liability insurance.

http://articles.moneycentral.msn.com/SavingandDebt/SaveonaCar/199-dollars-a-month-new-car-not-always-a-deal.aspx?page=1

[one...two...tree 2,762]

Consider buying a certified used car. Certified used-car programs from manufacturers are popular for good reasons. The cars have been inspected, sometimes warranties are extended, and often manufacturers' "captive" finance arms offer better financing than what's available for private purchases through banks or credit unions. Plus, of course, while a new 2010 Honda Accord LX sedan is $22,565, a virtually identical, certified used 2008 Accord LX sedan with 33,000 miles on its clock should run $19,600, according to Kelley Blue Book. The new 2010 BMW 328i sedan starts at $34,025 while a certified used 2-year-old 328i that's gone 33,000 miles should run only about $27,600. (You can check certified pre-owned listings at AutoTrader.com.)

IMO, buying a used car is the best way to save the most money, but the buyer has to know what a deal is vs. a dud, and avoid financing through the dealership unless the terms are good.

[Florianns Man 7]

IMO, buying a used car is the best way to save the most money, but the buyer has to know what a deal is vs. a dud, and avoid financing through the dealership unless the terms are good.

I just got my Mazda 3 5-door last month, I was not expecting to ever lease a vehicle but I couldn't pass up the deal. I got a 3 year lease of a nicer upgraded Mazda with 15,000 miles per year for $200 a month. I stilled owed a yer on my Jeep (bought used when i had bad credit). So I ended up saving $160 on month on my payment plus I get better gas mileage and don't have to worry about fixing up all the constant issues older cars have.

[w¡n9Nµ7 §£@¥€r 123]

I just got my Mazda 3 5-door last month, I was not expecting to ever lease a vehicle but I couldn't pass up the deal. I got a 3 year lease of a nicer upgraded Mazda with 15,000 miles per year for $200 a month. I stilled owed a yer on my Jeep (bought used when i had bad credit). So I ended up saving $160 on month on my payment plus I get better gas mileage and don't have to worry about fixing up all the constant issues older cars have.

And with a 15,000 mile a year allowance you're not as likely to go over. Nice deal.

Don't buy or lease anything. Like your current car? If it's running well, why get rid of it? It's exciting to get a new vehicle, it's fun to drive around in something shiny and new, and there's something to be said for rewarding yourself for a lot of hard work. But if you want to save money, it's hard to beat driving a fully paid for, reliable car that needs to carry only liability insurance.

That paragraph FTW. Sums up my car buying philosophy perfectly

[Niels Bohr 72]

Interesting...I noticed that too.

[SMOKE 1,426]

But if you want to save money, it's hard to beat driving a fully paid for, reliable car that needs to carry only liability insurance.

thats not a good idea. if you get in a wreck & its your fault, you're SOL. even if its a $5,000 car, & the insurance company totals the car. you'll get a check to at least cover your down payment on another one.

[one...two...tree 2,762]

thats not a good idea. if you get in a wreck & its your fault, you're SOL. even if its a $5,000 car, & the insurance company totals the car. you'll get a check to at least cover your down payment on another one.

Unless your car is worth less than a $1,000 like my '93 Honda Civic.

[SMOKE 1,426]

Unless your car is worth less than a $1,000 like my '93 Honda Civic.

thats a good point. but, how safe do you feel driving in rush hour? what happens if the other guy is an uninsured motorist?...sol on your car & any medical expenses.

[one...two...tree 2,762]

thats a good point. but, how safe do you feel driving in rush hour? what happens if the other guy is an uninsured motorist?...sol on your car & any medical expenses.

I'm an excellent driver.