Are Leasing and Smart Buy Programs a Good Deal?

Car dealers thrive on advertising the low payment. They focus on two different types of programs. First, there is the smart buy. Second is the lease arrangement. This is how a dealer can get you to the lowest monthly payment on a vehicle. They will tell you if you buy and sell cars a lot this is a much better deal.

Smart Buys

The whole idea is to get the payment down low for a period of time. Then at the end of that period there is either a trade in value for the car or there is a value at which you could purchase the vehicle. You can also walk away if you chose.

So let’s take a look at a smart buy example.

$ 21,795 sales price
$ 5,500 down
$ 279 a month for 48 months
12,000 miles a year limit

So, what if you took my advice and got pre-approved through Pentagon Credit Union? Let’s look at this deal in two ways, focusing on keeping the payment low. I am not advocating the low payment. I am just showing you what you can do on your own.

(1) $ 21,795 sales price
Nothing down
$ 350 a month for 72 months
$ 7,098 owed at the end of 48 months – should have equity in the car
No excessive wear penalties, etc.

(2) $ 21,795 sales price
$ 5,500 down
$ 262.35 a month for 72 months - should have equity in the car

Now let’s say that you chose option 2 and financed it on your own. If you were to pay $279 instead of $262.35 a month, you would have had the same low lease payment. However, the balance at the end of the 48th month would be $5,079. Do you think that you could sell the car for some equity at that point?

Now they also add to the equation that you would get a guaranteed trade-in value. However, that has a higher probability to not be a good deal because you lose all bargaining power. The reply to any attempts to negotiate could be – “We cannot give you that trade-in amount unless you buy this car at full MSRP.” That would not be a good deal.

In addition, you are limited to 12,000 miles a year. Beyond that limit, you will pay more. You also have the possibility of being docked additional money for excessive wear and tear.

Leasing

It is tough to find a lease that I can analyze. In looking through the Dallas Morning News, all I could find were the monthly payments. They never tell the value of the car. For the prudent buyer, that would be important information to know. So, that is left out of the marketing material.

I did find all of the information on a Porsche Cayman online. Here is the deal:

$51,390
$4,170 down
$650 a month for 36 months
10,000 miles a year limit
Penalties for excessive wear and tear

You could take out a Pentagon Federal Credit Union note at 4.99% for 72 months (remember this is about longer term notes to keep the note down). You would put down the same amount of money and finance the rest.

The payment would be $110 more a month with a balance at the end of year 3 of $25,370.27. A 3 year old Porsche with less than 30,000 miles should have a value much more than $25,370.27.

By not leasing and going with conventional financing, you paid an additional $3,960 over three years. If you were able to sell that car for at least $ 25,370.27 plus the $3,960 at the end of the three years, the lease deal made no sense. A three year old low mileage Porsche would probably command at least in the middle $30,000 area. You would definitely come out ahead.

CONCLUSION:

A marketing strategy that focuses you on the low payment is hardly a good deal. Auto dealerships are not out there to do you any favors. They are out there to sell cars. Their job is made easier by the fact that most people don’t research ahead of time.

Their smart buys and leases are determined by an end value and an interest rate. The key is to get the lowest rate of interest. You will need to do that on your own before you go shopping.

Let me also say that I am not advocating you take out 72 month loans. I am simply showing you how the deal works.

Finally, I am not trying to imply that auto dealerships are evil. They are in business to sell cars and help you fulfill that desire. If is up to you to know whether something is a good deal or not.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.