If you've been paying attention to the new car ads, you've perhaps noticed many of the sales pitches now focus more on low-payment leases than the cash-back, employee financing and zero-percent interest offers that were in vogue last year.
Some leases seem quite enticing -- the new Dodge Caliber for $229 a month, a 2007 Mercedes-Benz C280 4Matic for $389 a month, even a new 4.2-liter Jaguar S-Type -- a $50K-plus car -- for $649 a month.
But if you're tempted to take on one of these leases, beware that you may be dooming yourself to financial pain at the end.
The reason: These leases and others currently being offered by other manufacturers are based on driving no more than 10,500 miles a year -- just 10,000 in the case of the Benz, according to data on Edmunds.com. Drive more than the allotted amount and you're liable for as much as 18 cents per mile for the overage.
Since the average vehicle in the United States is driven about 15,000 miles a year, someone who chooses a low-mileage lease can wind up owing $900 or more when the lease ends.
Even the industry standard lease allows only 12,000 miles a year, which begs the question of why, given the average American's driving habits, aren't leases based on 15,000 miles per year?
The answer is complex and not designed to benefit consumers.
First, the leasing company wants to get back a vehicle that is pristine and will quickly bring top dollar at the wholesale level. A three-year-old car with just 30,000 miles on the odometer is, to use an old car sales term, a cream puff. The same car with 45,000 miles is just another used car.
Then, perhaps more insidiously, the leasing company may be banking on collecting additional fees at the end of the lease, knowing full well that when it puts a consumer in a car with a 10,000-mile annual limit there's a strong likelihood that penalty charges will accrue.
Last, there's big business in refinancing leased cars at the end of the agreement, when the consumer realizes that he or she is facing significant penalty charges and opts to take out a conventional loan to buy the vehicle for the residual price.
On a vehicle I leased from Bank of America, I was routinely sent letters at the end of the lease offering to convert the lease into a new, four-year conventional loan. Had I taken the offer, I would have been saddled essentially with a seven-year loan on a vehicle that I initially expected to drive for just three years.
So now more than ever it's important for car shoppers to look closely at the terms of new car leases, make honest assessments about their driving habits and to try to negotiate more reasonable mileage limits, even if that drives up the monthly payment.
Here are this week's reader questions:
- Car-lease ads sound too good
- The dealer sold me the wrong car. What can I do?
- Should I buy a car or save for a house?
- How can I remove a co-signer from my loan?