Opinion: Shopping for new wheels: When to buy and when to lease

Are you still wondering whether it’s better to buy or lease a new vehicle?

I believe it doesn’t matter much which you choose. What matters is the deal you get.

The line between buying and leasing automobiles has become so blurred in recent years as to be almost invisible.

Look at it this way: You buy a new car with money borrowed from a dealer or manufacturer. Sooner or later, you take the vehicle back and hope to get a fair price for it.

It works much the same way with a lease, except that technically you don’t own the vehicle.

The difference with a lease is that, at the end of the lease period, you return the vehicle and hope that there will be no penalty charge for excessive wear and tear.

I bought a new car last year, partly because the manufacturer offered zero per cent financing for three years. But I don’t know if I was overcharged because I didn’t shop around or negotiate aggressively enough.

However, I’m sure a friend of mine got a good deal when she leased a new Honda recently from an Ottawa dealer.

To understand how and why, one must understand how a lease works.

Lease payments are based on three factors: the retail value of the vehicle when new; the estimated wholesale value at the end of the lease; and the interest on whatever sum is owed on the vehicle.

In my friend’s case, the interest rate was three per cent. On the surface, that doesn’t seem to be as good a rate as I got. However, it’s well below the market rate, which can be 10 per cent or more on consumer loans, even in these times of historically low interest rates.

Where my friend saved big was on the nominal retail value of the car when it was new. The manufacturer’s suggested retail purchase price was about $30,000. But discounts by the manufacturer and/or retailer reduced this figure by almost $4,500. That’s equivalent to a 15 per cent discount if my friend had been buying the car, which I believe is an above-average discount when purchasing an automobile.

With those savings of $4,500 plus interest, my friend’s payments over the four-year lease term are about $325 a month, including tax. (Her monthly payments were also lowered by a down payment of about $5,000 at the start of the lease.)

Most lease payments, of course, are lower than most car loan payments because those who lease are buying only part of the vehicle’s life.

At the end of a four-year lease, my friend will no longer have wheels, unless she buys or leases another vehicle, or opts to purchase her present vehicle, by then four years old, at the already-agreed-upon wholesale price. I, on the other hand, will own a four-year-old car, with years of life left in it, I hope.

To me, that’s the problem with leasing versus buying. Leasing  encourages you to switch to a new vehicle every few years, which can be a pricey proposition when one factors in depreciation costs.

According to the Red Book, the bible of Canadian used-car prices, a new vehicle typically loses up to 50 per cent of its value in the first three years. Take, as an example, a 2010 Chevrolet Malibu four-door sedan. When the car was new, the manufacturer’s suggested retail price was $23,995. Today, the Red Book puts its average wholesale value at $11,600 and its average retail value at $13,800.

For some, leasing a vehicle has its advantages. For one thing, it simplifies claiming a vehicle as a tax expense. Vehicle owners can also write off part of their costs if they use the vehicle for business, but that’s more complicated, tax experts say.

There is also a significant savings in sales tax for those who lease. No tax is levied on the vehicle’s estimated value at the end of the lease. If, for example, the vehicle had an estimated wholesale value of $10,000 at the end of the lease, the savings in sales tax in Ontario would be $1,300.

Another potential benefit from leasing is to those with low credit ratings, many of whom may be charged more than 10 per cent for a consumer loan from a bank, if they can get a loan at all.

Bruce LeBlanc, lease manager of AADA Leasing in Ottawa, says: “We can sometimes offer terms that no bank or dealer can match.”

Whether you are buying or leasing, what you need to know is the dealer’s bottom-line price.

One good way to learn this is from Consumer Reports’ Canadian New Car Price Service.

This is an online service that will tell you the rock-bottom price you might be able to negotiate for any make or model, for a fee of about $32. In many cases, this price is at least 10 per cent below the manufacturer’s suggested price. Just go online to ConsumerReports.org.

The car industry claims its retail pricing has become more transparent by including items such as freight in advertised prices. But it still has a long way to go. Recent ads in Ottawa by Chevrolet dealers contained this line in small print: “Consumers may be required to pay up to $799 in dealer fees.”

What are dealer fees? And why shouldn’t all retailers’ costs be included in the advertised price? That’s why it’s helpful if you know the dealer’s bottom-line, all-inclusive price.