Monday, July 13, 2009

LEASE A NEW CAR BEFORE YOU BUY IT

I wrote another column that was entitled, “Buy a New Car before You Lease It”. The main message in that column was to establish the lowest “capitalized cost” which is critical in determining your lowest lease payment. Almost every lease ad I read establishes the capitalized cost at MSRP. My column explains that you should shop and compare prices as if you are going to buy the car. Once you’ve determined the lowest price, you can then ensure the dealer you are leasing from uses that lowest for your capitalized cost on the lease and not full sticker or MSRP.

The reciprocal of this rule is also true. The purchase price of your new car is only one component in the total cost of ownership. Depreciation is the largest single cost of owning. Two different make/model cars can have almost identical prices, but one can easily depreciate thousands of dollars more than the other. For example, in the current Automotive Leasing Guide, the residual value for a Honda Accord sedan on a 36 months lease is 52% and the residual value for a Chrysler Sebring sedan is 25%. The MSRP of these two cars is $22,400 for the Honda Accord and $21,900 for the Chrysler Sebring. The Sebring depreciates $16,245 in 3 years! The Accord depreciates only $10,752. Even if you were able to buy the Sebring for a much larger discount than the Accord, the discount would not offset the extra depreciation.

The Automotive Lease Guide, ALG, is the “bible” that virtually all leasing companies use to establish the used car value of the car they lease you at the end of the lease. All car dealerships, leasing companies, and banks that lease cars will have a copy of this book. You can get information from ALG’s Web site, www.ALG.com and you can also get information on residuals and depreciation from www.KLB.com and www.Edmunds.com.

ALG has been doing this for more than 40 years and they look at many factors before they establish a residual number for a particular year, make, and model vehicle. For example, the residuals for Chrysler and GM products plummeted when these companies entered bankruptcy. The residuals for these makes came back, although not all the way, after they emerged from bankruptcy. Higher priced cars typically have higher markups and as a general rule, depreciate faster [have lower residuals] than low priced cars. Cars with high sticker prices can have a markup of 25% and a low sticker priced car can have a markup of 8% or 9%. Vehicles that you typically see large discounts and cash rebates on, most recently Chrysler and GM, are usually the ones that depreciate the fastest.

The biggest single factor that translates into a higher residual [low depreciation] is high quality. Historically, Asian vehicles have typically ranked highest in quality surveys. My favorite judge of vehicle quality is Consumer Reports and in their tests for reliability there was only one American nameplate in the top 10, the Chevrolet Corvette ZO6 manual.

Another important factor in establishing depreciation rates is the price of gasoline. The residual values of trucks, vans, and SUV’s plummeted over a year ago when the price of gas hit $4 a gallon. As you might expect, the residual values of fuel efficient cars, especially hybrids, soared. With gas prices being volatile, you may want to consider leasing if you want to “lock in” the depreciation. You can hedge the price of gasoline and let the leasing company bear the risk or reward. At the end of the lease on a big truck if gas prices go back to $4.00 or higher, the resale value will plummet but you can simply walk away from the lease vehicle and let the leasing company absorb the loss. On the other hand, it the price of gas drops precipitously, the resale/residual will rise. You can then exercise your purchase option and “flip it” to the dealer who will pay you the higher wholesale value.

The bottom line is that, if you are going to buy your next car, don’t make a final decision until you know what the ALG residual value for that specific year, make, and model is. The higher the value, the less is the cost of depreciation which translates into a higher trade-in allowance when you go to buy your next vehicle. Or, it translates into being able to sell it outright for more money.

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