Auto Leasing Losing Appeal

Leasing has become a way of life for many Americans.

In the early 1990s, one in 10 new cars that left the dealer lot were leased, according to Lendingtree.com. By last year, the number had increased to one in five.

But driving a new model every three years could lose some of its appeal now that falling interest rates are making it easier to finance the purchase of a car. Not to mention troubled U.S. manufacturers that are falling over each other to provide cash rebates and other incentives as sales drop.

Lease payments are typically lower than loan payments because they're based on the purchase price of the car minus the vehicle's residual value, or what it's worth at the end of that term.

Say you've decided that a $20,000 2008 Subaru Forester belongs in your garage. If you lease it for three years and it's expected to depreciate by 60% over that period, to $12,000, your monthly payment would be based on the $8,000 difference.

By comparison, when you buy a car, your monthly payments are based on the entire $20,000 purchase price.

(Taxes on a lease are lower than those for purchases. That's because, in most states, the tax is based on your monthly payment, rather than the total value of the vehicle.)

Until recently, rising interest rates made it that much more expensive to purchase a car that to lease. But since late September, with the mortgage crisis spreading and the economy slowing, the Federal Reserve started cutting short-term rates. This cheaper financing is reducing the relative appeal of leasing over buying.

There are also fewer deals available on leases than there were in the early 1990s, when the practice really started catching on. At that time, the finance arms of U.S. automakers were competing fiercely with banks for business. They offered better terms by inflating the resale value of cars. But these projections of resale value proved overly optimistic, and manufacturers ended up losing money on the leases.

These days, you're more likely to get a deal from the finance arm of Ford(F Quote) or General Motors(GM Quote) on the purchase of a car than on a lease.

Still, the decision to lease or own comes down to more than just the cost of financing.

As with renting your home, when you lease a car, you pass up on the opportunity to build equity. You also pass up on the chance to buy a used car, which can be considerably cheaper than a new one.

You also typically need better credit to lease than you would to purchase a car, since you don't own it -- the bank does. "Most banks will look at prime or near-prime for leasing," says Tarry Shebesta, president of the National Vehicle Leasing Association. She says lenders are typically looking for FICO scores in the mid-600s and up.

Do you want to drive a car that might be out of your price range? Are you the type of person who can't live without the newest model every two or three years? Have you diligently kept your cars free from excessive wear and tear? If so, you may want to consider leasing.

"If you always find yourself with a car payment, you should consider leasing," says Shebesta. "What you find is people taking out long-term loans and trying to get out of their cars prior to the end of the loan. They find themselves in negative equity, which goes into the next car and that snowballs into the next car."

But if you expect to drive your next car for at least five years, would prefer a used car, or if your lifestyle requires driving more than 12,000 to 15,000 miles a year, it probably makes sense to buy.

If you do opt to lease, don't begin by negotiating the monthly cost of the lease, says Allison Vail of Lendingtree.com. Instead, start the bargaining over the price of the car. Bringing that down will bring your monthly payments down.

In fact, you probably shouldn't even tell the dealer you plan to lease until you've agreed on a price, she says.

It also pays to explore leasing packages from multiple dealers, just as it does to shop around for a car loan. Check the local credit union, which often offers cheap leases to members. Compare that against online packages and what your bank provides. Getting these lenders to compete against each other for your lease can be a real money saver.

You need to be aware of some costs associated with leasing that aren't an issue when taking a loan, says Al Hearn, president of LeaseGuide.com. Lessees pay an acquisition fee -- or "bank fee" -- in addition to the cost of the vehicle. That amount typically ranges from $595 to $995 and is set by the lease company or bank.

A security deposit, usually the same amount as the monthly payment, is often required, and lessees can face a "disposition fee" when a car is returned at the expiration of the lease.

You should be aware that there are steep penalties for breaking a lease before the term has expired. In addition bearing responsibility for all remaining payments on a lease, lessees may have to pay thousands of dollars in early termination fees to escape. However there are some new services that match lease sellers with prospective buyers online in a low-pressure environment.

Best Auto Rates for Largest Metro Areas
City	Term	Rate
Miami	36 months	3.50%
Washington	36 months	3.50%
Houston	36 months	5.50%
San Franciso	36 months	5.98%
Atlanta	36 months	6.14%
New York	36 months	6.34%
Dallas	36 months	6.39%
Chicago	36 months	6.44%
Source: BankingMyWay.com