Chrysler has announced that it is getting back into the new-car leasing business this month after a one-year hiatus. General Motors restarted its leasing program in July.
After a year of oddball deals that included two-for-one offers and Cash for Clunkers, American drivers now have more ways to pay more than they ought to pay for transportation.
Many shoppers like to lease cars because leases offer the lowest monthly payment on a shiny new vehicle. Taking out a loan to buy a car cuts deeper into household cash flow. But when you pay off that car loan, you own a car. When you finish your lease, you own nothing.
Leasing makes sense for people who are willing to pay extra so they can always be at the wheel of the newest model. For those who want reliable transportation at the lowest cost, however, leasing is a bad option. Paying off a loan, generally as quickly as possible, will usually be more cost effective. Even better is the old-fashioned approach of saving your money and paying cash up front.
My first car was a 1972 Buick Electra 225. My cousin Bernie gave it to me when I was a junior in college. It had 94,000 miles on it, and I loved it. I drove it out to Montana, and I had it when I started my first job. It carried me smoothly through the transition from school to work. It finally gave out after five years, but, during those five years, it allowed me to save enough money to pay cash for my next car, a three-year-old Chevy Impala.
Once again, I had no car payments to make, so I could instead put money aside for the eventual replacement. This had the added benefit of giving me a cash cushion that I could use for other contingencies. Financial planners have always advised young people to set aside such an emergency fund.
Since then, I have always paid for my cars up front and used them as long as possible. Each of my daughters left for college in a paid-up, safe, well-maintained vehicle that her father had spent four years or so breaking in for her. My eldest, who graduated in 2008, still drives that car I gave her more than five years ago.
When I am in Florida, I drive a 10-year-old Toyota minivan that my daughters affectionately call “the Magic School Bus” after a favorite series of children’s books. It got its name when my girls were still young and they would pile into the van with a half-dozen or so of their closest friends.
I seldom need to transport large numbers of children these days, but keeping the van saves me from having to rent a car, or buy another one, for the time I spend in Florida. The Magic School Bus is just another retiree in the Sunshine State. It probably would not hold up to the daily wear and tear of northern urban life, but down South it still chugs along and gets me from Point A to Point B.
Not long ago, American consumers were buying 16 million or more cars per year. Car makers will be fortunate if they sell 10 million this year. They desperately want to move the metal, which is one reason the Cash for Clunkers program required dealers to destroy serviceable vehicles that customers traded in. It’s as if we hatched a plan to revive the construction industry by tearing down perfectly good houses and then replacing them.
Car companies predict the return of leasing will boost their sales, and they are probably right. Chrysler’s lead sales executive, Peter Fong, said in a statement that the program will “benefit consumers who have long been fans of leasing and appreciate the flexibility this financing option gives them.”
Leasing may not be that much of a boon to the car companies’ affiliated lenders, however. Lenders that offer leases must guess how much the cars will be worth when the lessees bring them back in two to five years. If they guess wrong, they can be stuck with cars worth less than the original price minus what the lessee paid. This is exactly what happened last year.
So, while many will celebrate the return of leasing to showrooms where it was missing in action, I would not get very excited by the opportunity to pay for my new cars forever. If you want to spend the least, don’t lease.