THAT NEW CAR SMELL

John proves that leasing isn’t a lemon

JOHN MILLER WAS BORN IN VIOLA, ILLINOIS, a quaint village of less than one thousand people.

“Except for being in the North, it was a lot like Mayberry. Seriously,” the seventy-year-old says. “People were your typical down-to-earth, shirt-off-their-back types, who looked out for each other—good and bad. The land was quite flat, with rich black dirt. Great farmland.”

His parents were typical Depression-era types. “Frugal to a fault,” John tells me. “You would have loved them!

“They maintained a monthly budget, and by ‘maintained,’ I mean they stuck to it. They accounted for every penny they spent. If we ate out, Dad would write down the total on a slip of paper and stick it in his pocket, to be recorded later.”

John originally intended to teach guitar at the college level, but he went into the navy, got out in 1970, and went into broadcasting to work his way through graduate school. That ultimately led to a public relations career, and in 1984 he transitioned to computers, doing IT work.

He’s had stints at big companies like Georgia-Pacific and the Coca-Cola Company. Now in retirement, he’s back to music while living in Fayetteville, Georgia.

John is also a big fan of car leasing.

“In retrospect, I may have been a leasing trendsetter,” he tells me. “In 1978, I almost had to arm-wrestle the dealership to get them to lease a car to an individual.”

That was thirty-five years ago at a Pontiac dealership in Jacksonville, Florida. His first hurdle to the lease was overcoming the dealership bias that “leases are for businesses, not people.” Of course, there was no valid business reason why they couldn’t lease to an individual, so John was soon on his way in his new white Grand Prix with a dark red interior.

At the time, he was working as a regional PR manager for the St. Regis Paper Company and being paid mileage for business use of his privately owned vehicle. He needed a nice reliable car for image reasons. But he also wanted to keep the bare minimum of money invested in it, knowing that he’d walk away from it in a few years.

“I ended up leasing . . . for considerably less than car payments would have been. In ’81, I happily turned it in. I would have just as happily bought it for what turned out to be a nominal residual value, but I’d just bought a new replacement for less than invoice price.”

Over the many subsequent years, John has gone on to buy or lease nice late-model used cars, beaters, and even a couple of new cars for the use of himself, his wife, and his daughter.

“For me, the buy-or-lease decision boils down to whatever will best leverage my funds,” he says.

I’ve long been an outspoken critic of leasing. Sure, you might get a low monthly payment, but you have to come to the table with a big nonrefundable fee called “capital cost reduction” or “capital acquisition fee.” This can often be between $2,000 and $4,000. It’s like you’re prepaying a portion of the lease in advance; that’s what artificially makes that monthly payment seem so low.

Unfortunately, too many people use leasing to get more car than they can afford.

Let’s say that upfront fee I just talked about is on the low end at $2,299, and you get a lease payment of $249 a month for thirty-six months. The thing you’ve got to know is the effective price is more like $313 a month, not $249. You’ve got to consider that $2,299 over thirty-six months works out to about $64 a month. Add that to the $249 and you’re now at $313.

And that’s just why it stinks before you drive off the lot!

On the flip side of leasing, when you’re getting ready to turn the vehicle in, you could face more fees if the car’s condition has degenerated beyond normal wear and tear, or if you’ve gone over the typical allowance of 12,000 miles annually.

Plus, after three or four years of making payments, you own nothing—unless you buy the car for its residual value.

Not a good deal in my book.

But, as I mentioned, John loves it. His rationale is that he knows cars rapidly lose value during their first years of ownership—so he’d rather not be an owner.

“There’s a fundamental issue here. How much do you want to be invested in a depreciating asset?” John challenges me. “A guiding principle of mine has always been to minimize equity in depreciating assets. I have always wished for car payments to be approximately equal to interest plus depreciation, with the result that at the end of the term, there would be no equity in the car.”

In fact, John can’t get his head around why I would even worry about the question of building equity in a vehicle when he could so easily sidestep that question with leasing.

“I think we all agree that term [life] insurance is better than whole life or ‘permanent’ insurance, because using an insurance policy as a savings account is not the best use of funds,” John tells me. “Why, then, would we want to use automobiles as savings accounts?”

John and I don’t disagree on everything, though. It seems he’s really taken my advice about ways to cut the cord from pay TV.

“Sitting here watching a M*A*S*H rerun, smiling warmly at having gotten rid of the cable company,” he wrote in a recent post on his Facebook page. “In addition to [local] broadcast stations, some of which are HDTV, I’ve got Amazon Prime, Hulu Plus, and Crackle for a total outlay of less than $16 a month. Variously using Roku player and PC to deliver the signal to TVs.”

What tips can you glean from John’s story if you’re looking to lease?

Know when leasing can work.

• As I’ve long said, there are really just two times when leasing makes sense. The first situation is if you know that you like to have new wheels every three years and you don’t want to worry about disposing of your old ride. Then it’s ideal for you.
• The second scenario is when there are special factory-subsidized leases (primarily on luxury vehicles and electric vehicles) or a manufacturing oversupply that leads to great deals at the dealership. Luxury automakers hate to cheapen their brands with a bona fide sale, so they often offer such leases to help move extra product.
• How do you know it’s a factory-subsidized lease? Look at the advertising. When it pushes the brand rather than your local dealership, you’ve got a pretty good indication that’s a factory-subsidized lease.

Know your usage patterns.

• Most leases give you strict mileage allowances. That typically means you can drive an average of 12,000 miles per year with no penalty. If you go over that cap, you have to pay a penalty of 15 or so cents per mile when you turn the car back in.
• A lease might not work for you if you’re a super-commuter with a daily ride of ninety minutes or more each way—unless it’s for a company car where the lease is subsidized. But even then, the amount your company is paying could change without notice, or you could leave the job or get fired. Be careful.

Return the car in good condition.

• When you return your leased car, the dealership will be looking carefully at the condition of the vehicle. That’s why I recommend hiring an auto detailing service to make the car look spick-and-span. If you damaged something on the car, like maybe there’s a busted mirror or a minor dent in the body, pay to have the repair done yourself before you turn the car in. Be sure to save your receipts and take plenty of pictures to document that you turned in the car in perfect condition.

To buy or not to buy at the end of your lease?

• So you’ve reached the end of your lease and you’re unsure what to do. If you liked the experience of driving the car, it makes the most sense to consider buying the vehicle for its residual value. That’s the best way to turn a not-so-good financial decision into a good one. Just be sure you have some cash on hand for this. Banks might not want to lend you the money for a car with a lot of miles on it.

Buy formerly leased vehicles.

• Finally, you can get a real deal on a vehicle that someone else leased. In fact, it’s not uncommon to pay half the retail price or even less when you’re buying a previously leased ride. John told me the following story about his experience: “In 2008, I bought a 2004 Jeep Grand Cherokee [with] one hundred thousand miles that was just coming off a corporate lease [at] Georgia-Pacific from a former colleague of mine. Got it for $7,000 cash, which was 20 cents on the dollar compared with the sticker price.” And he tells me he’s still happily driving it today!