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Is it a good idea to lease?

Consumers who lease vehicles are confronted with a decision after a few years of ownership. Do I give back the car after the contractual lease period ends, or do I buy it?

The decision can spawn uncertainty and angst. And it's more relevant today than ever because of low buyout prices written into lease contracts several years ago versus today's unusually high used-vehicle prices. The result is that many consumers will discover they can buy their leased car for less than market value. That makes it a financially good idea to buy the vehicle, even if they only want to resell it and pocket the difference.

"There is a high likelihood your vehicle is worth more than the lease-end value," said Eric Lyman, spokesman for ALG, a data provider of leasing values to the automotive industry.

If your goal is to spend less money on vehicles, personal finance experts almost universally advise against leasing, compared with buying a vehicle and keeping it a long time. Still, about 43 percent of luxury cars and 18 percent of mainstream cars will be leased over the next couple of years, according to ALG estimates.

Typically, lease contracts include an option to buy. Here are factors to consider if you're thinking about buying out a lease.

Buyout price. In lease terminology, this is essentially the "residual value" of the vehicle. It's a number you'll find in your lease contact. This is the predetermined price you agreed to pay if you wanted to buy the car at the lease's end. In theory, the dollar figure represents the unused value of the vehicle when the lease term expires. The buyout price can vary from the residual value by the amount of a security deposit or a buyout fee.

Market price. Find out what your vehicle is really worth. Go online to such websites as kbb.com, edmunds.com and nadaguides.com. Look up current market values — retail prices — for your exact model, plugging in mileage and the vehicle's options. You can also see retail prices at such online marketplaces as cars.com and autotrader.com.

Compare. How close are the two numbers, the buyout price and the market price? The main question you're trying to answer is, "Could I buy this exact vehicle as a used car for less money than my buyout price?" "Just make a comparison to see how it stacks up," said Ronald Montoya, consumer-advice associate with Edmunds.com. If you're going to "flip" the vehicle — buy it and resell it yourself — compare the buyout price to private-party or trade-in values. If you'll make money on the deal, consider whether it's enough to endure the hassle of selling it yourself.

Penalties. Also include in the calculus any penalties you might incur because you've exceeded the mileage limit or because the vehicle has sustained excessive wear and tear. This is money you have to pay if you return the car but would not have to pay if you bought the car. On the other hand, excessive miles and wear reduces a vehicle's value, meaning the car you're buying could be worth somewhat less than the residual value, which assumes no excessive miles and wear, said Mark Ragsdale, author of the book "Car Wreck," about the U.S. car industry.

Care. Perhaps the most difficult factor to assess is your peace of mind. How much is it worth to know a vehicle's driving and maintenance history? "This is a great way to get a used car, because you don't have to worry about a car's history. You're the one who owned it," Montoya said. "Even if it costs a little more, it's less of a risk than buying in the used market."

Try to negotiate. Contact your leasing company — not the dealer — and ask if they will lower the buyout price. Unfortunately, few leasing companies will allow you to haggle, but "it's definitely worth asking the question," Montoya said.

Hassle factor. Buying out a lease allows you to avoid the time-consuming task of car shopping, although you will have to arrange financing if you can't pay cash. Check loan rates with your leasing company — often banks — which might be able to arrange financing and reduce paperwork because it already has a relationship with you, Lyman said.

Break the leasing cycle. While leasing offers a few advantages, such as lower repair bills, latest safety features and the opportunity to drive late-model cars, the price is steep compared with purchasing a vehicle — especially a used vehicle — and driving it for many years. Serial leasing means you'll always be paying to own vehicles during the most expensive portion of their lifetimes, when depreciation is greatest. A vehicle might lose 30 percent or more of its value in the first year, and that's reflected in your lease payment.

If you want to make the transition from leasing to owning, buying out the lease for a vehicle can be a good idea — especially if you can buy it for a great price.

gkarp@tribune.com

Copyright © 2014, The Baltimore Sun
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