My wife and I have just started the process of buying a small car for her, around the $15,000 price range.
The salesman at the Honda dealership suggested that we should lease rather than buy. He intimated that most people are leasing.
Is there some way I can compare the pros and cons of leasing versus buying, with the thought that we may be able to pay cash for the car?
Thank you, Jim
Cato: Honestly, if you can afford to pay cash, do it.
Buy the car. More often than not, it's cheaper in the long run, and in your case I am sure it would be.
Leasing a car — renting a car, to be more precise — is a way to lower the monthly payment, but you pay for that privilege. Jim, for you I think buying is the better option.
Vaughan: Cato, you are becoming far too sensible. I don't recognize you any more. The next thing I know, you'll be promoting the benefits of free markets.
Cato: I'm all for free markets. What I am against is unregulated free markets. Human beings are not to be trusted without a clear set of rules, rules that are enforced thoroughly and completely and knowledgeably.
Vaughan: Oh, no. Here comes the Nanny-State.
Cato: Look, all you need to do is look at the subprime mess in the U.S.
That's what happens when the regulators fall asleep, or are put to sleep, at the wheel.
Vaughan: Can we get to an answer for Jim?
Cato: Fine, fine. First, I want to talk about what is about to happen in the leasing market.
Vaughan: You've already given Jim the correct answer — quit while you're ahead.
Cato: Look, a calamity is brewing, one of huge proportions.
Look at this new data from DesRosiers Automotive Consultants. It is based on new- and used-vehicle valuations from the Canadian Black Book and it points to a looming crisis among leasing companies. Some face big-time residual value losses at the end of some of their leases now out there right now.
Vaughan: Residual values — used-car values — have been in decline for this whole decade. DesRosiers says residuals have declined by between seven and 10 percentage points since 2000.
Cato: In a nutshell, Jim, those leasing companies that have not been right about what a leased vehicle will be worth at the end of a lease — or lessors who have been subsidizing their leasing with inflated residuals that lower the monthly payment — are going to get whacked with big losses.
Vaughan: We've seen this before.
There was a time, the late 1990s, when high residuals were, as DesRosiers says, the "crack cocaine" of the automotive industry.
Leasing companies were setting excessively high residuals in order to lower the monthly payment.
Cato: Then when residuals declined, the leasing companies wrote down millions and millions in residual value losses. We both know something similar to this is brewing now in Canada.
One reason: All the discounting and price-cutting in the Canadian new-car market is going to hit residual values eventually, say in two or three years.
Vaughan: Jim, you can try to play this game — you can bet that a leasing company will give you an excessively high residual that will lower your monthly payment now and then allow you to buy out the lease at a bargain price at the end of the lease term.
Cato: Or not. That's a form of gambling and I'd not recommend it, not for such an affordable car.
Vaughan: To begin with, Jim, your salesman is being misleading. Yes, about 50 per cent of new-vehicle transactions in Canada are leases, but leasing rates vary from model to model.
For example, the Power Information Network says that less than 11 per cent of Mazda5 transactions are leases. Some 87 per cent of buyers finance.
Cato: Typically in Canada, the more expensive the vehicle, the more likely it is to be leased.
As we said, it's a monthly payment thing — it's all about reducing the monthly payment.
I suspect the Honda type felt the easiest way to get you into a new Honda would be through a lease. By dangling a low monthly payment, the salesman has a way to get you to sign the deal.
Vaughan: As Cato said, a lease is essentially a long-term rental contract.
There may be some tax advantages for the self-employed, or it may be a perk for the middle-management types if the employer pays the lease.
The monthly payment is primarily based on how much the vehicle depreciates or loses value during the life of the leasing contract.
Cato: I'm glad you brought up leasing contracts. They are loaded with restrictions you don't need, Jim — kilometre limits, potential wear and tear costs, the maintenance requirements and so on.
Vaughan: Jim, leasing is absolutely the most expensive way to finance a vehicle — if you plan to keep it for the life of a vehicle.
Cato: Remember, Jim, the average Canadian who buys a new vehicle keeps it for 8.2 years.
Typically, most new-car loans are paid off within four years. So your average Canadian car buyer can look ahead to at least four payment-free years with each new-car purchase.
By contrast, most vehicles in Canada are leased on three-year contracts.
Vaughan: Jim, what we're saying here is that by leasing, you either face another lease agreement in three or four years, or you must buy out the vehicle after having already spent money on various fees and such.
Cato: Jim, if you do go the leasing route, make sure you fully understand the capital cost — that is, the full price of the vehicle — what interest rate you are being charged, the total interest cost, interest calculations, administration fees and anything else in the fine print, such as early termination fees.
Vaughan: Cato is saying that leasing contracts are definitely more complicated than purchase agreements.
Take the time to understand what you're getting into and get advice from a financial expert if necessary.
Cato: In the meantime, Jim, let's take a quick look at three $15,000 models that come from brands with the best residual values.
The Toyota Yaris is a perfectly suitable grocery-getter. The LE four-door hatchback lists for $14,245. After four years, the Canadian Black Book says the average Toyota holds 48.7 per cent of its original value — 13.3 percentage points above average and second-best among all passenger-car brands.
Vaughan: Next we've got the Volkswagen City Golf four-door hatchback at $15,300. VW is ranked No. 5 for residuals, holding on to 8.7 percentage points more than the average — which among cars is 35.4 per cent.
Cato: Finally, the Honda Fit four-door hatchback, at $14,980. Hondas typically hold 43.6 per cent of their value after four years, seventh-best in Canada.
You should be able to get an even better price now, too; Honda is introducing an all-new 2009 Fit this fall so the pressure is on — or will be on — to blow out the remaining '08s.
Vaughan: Cato, in this case I hate to agree with you, but I must.
But only because the '08 Fit with a manual transmission also qualifies for a $1,000 federal government ecoAuto rebate. The economic case wins it for me.
Cato: As usual.
Jeremy Cato and Michael Vaughan are co-hosts of Car/Business, which appears Fridays at 8 p.m. on Business News Network and Saturdays at 2 p.m. on CTV.
