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Car leases make comeback, with new traps

Car leasing is back.

If you've watched any major sporting event on television recently, you've seen the evidence. Advertisements constantly screech that drivers can get a new car for under $300, $250, even $200 per month. Your ears and eyes aren’t lying. Edmunds.com says leases accounted for 1 out of every 4 new car purchases in December, the highest level in five years. 

As you might imagine, this development is a mixed bag for consumers.

Leasing was left for dead after the financial crisis of 2008, which took with it several automaker financing subsidiaries. But now, it's springtime in lease-land. According to Edmunds.com, there are currently more than 40 new car models available for lease for $200 per month or less nationally -- everything from a Honda Civic to a Mitsubishi Outlander. And regional dealers are offering even more “low, low prices.” Drivers across the country can even get a Nissan Sentra that sets them back only $139 a month.

"Honda and Toyota have really stepped it up on their lease deals," said Jessica Caldwell, an analyst for Edmunds.com. Both manufactures have products lines that are “late in the cycle,” and they are pushing leases in an attempt to stay competitive, she said.

Jeff Bartlett, the online deputy auto editor for Consumer Reports, said leases have returned for a simple reason: “Factories don't build used cars.”

Lease deals with tempting low monthly payments are a time-tested way of moving new cars off dealership lots. 

But if those prices are so low that you think there must be a catch, you win the Red Tape skeptical reader award. Leases have always been a complicated affair for consumers. Those low monthly payments come laden with some of the finest small print the auto industry can muster. Despite the pleasing sound of low payments, leasing is usually an expensive way to finance a car. But this new crop of leases have even trickier terms and deeper financial potholes, meaning careless buyers could easily end up with a lemon of a deal.

Marketers who design lease deals spend a long time playing with spreadsheets and data that show certain price points are very appetizing to consumes, said Bartlett.

"The first question is always, 'How much can you spend a month?’ A number that has tested well is $199," he said.

But what does $199 really get you? Not as far as you’d think. Traditionally, car leases have allotted drivers 1,000 miles per month, resulting in leases that look like this: 36 month/36,000 miles, 24 month/24,000 miles, etc. Overages come with hefty price tags, usually costing drivers at least 15 cents extra per mile. 

Anyone who's ever driven prematurely out of an automobile warranty knows that's not a very generous allotment. But many new lease deals undercut even that miserly mileage limit.

Why 10,500 miles per year?

One new lease being offered by Ford dealers lets consumers drive away with a new Fusion for $199 per month for 24 months -- but they are capped at 21,000 total, or 10,500 miles per year. A consumer who drives that Fusion using the terms of an old-fashioned lease, and returns the car with the odometer reading 24,000 miles, will be handed a $450 bill. Spreading that penalty out across the 24 months makes that $199/month deal equate to a $219/month deal.

That's still not bad, but it's important for consumers to know exactly what they are getting into when they are signing a lease. Nothing is worse than buying a new car and being afraid to hit the road, lest you drive yourself from a good deal to a bad deal. For example, average 15,000 during the aforementioned Fusion lease, and you'll find a $1,350 bill waiting when you return the car.

Luxury car brands like Jaguar, Saab, and Acura have used low-mileage leases for a while, but now they've spread across mid-range car categories, Caldwell said.

Bartlett warned that many new leases also require larger-than-normal down payments ("capital reduction" payments) to arrive at those seemingly magical monthly payments.

"You can end up with some really weird terms," he said. "I've seen more in the last six months, to get those low rates for advertisements there are very high down payments. I've seen some really big numbers ... which send a confusing mixed message to consumers. A person attracted to $199 per month might not have $4,365 to use as a down payment."

Here's one such complicated arrangement. Mini-USA is offering a $199/month deal on its 2011 Cooper 2-door hatchback. Sounds good. But buyers must show up with $2,727 as a down payment. And they must drive the small car small distances -- no more than 833 miles per month. The punishment for excessive mileage? A not mini 20 cents per mile. Someone who drives the normal 36,000 during that three-year Cooper lease ends up with a $1,200 bill at the end. Drive 15,000 miles per year, and the bill is a whopping $3,000.

Of course, drivers who exceed their mileage have the option of buying their car at the end of the lease, paying the agreed-upon "residual value." But Bartlett said end-of-lease purchases are almost always a bad deal.

"You always end up paying more for the car than someone would who just walked in off the street to buy it," he said.

RED TAPE WRESTLING TIPS

So should you consider leasing? Despite these booby traps, yes, you should. Just remember that car dealers have invented this genre -- and are now reinventing it -- to make money. They usually have the spreadsheet on their side.

Leases only work well for certain kinds of buyers. The most obvious category: Someone who drives limited miles and relishes the smell of a new car every two to four years. Traveling salesmen and other mobile workers who use their automobile for employment-based travel will find leasing brings with it certain tax advantages -- such as greater and simpler tax deductions.

And Bartlett said there's a new category for leases, courtesy of our shaky economy: Workers who've been temporarily transferred to a new location or who find themselves in transient circumstances, such as recent graduates.

"Let's say a person knows they'll be somewhere new for only a couple of years,” he said. “... Maybe they don't want to be obligated for five or six years of car payments to purchase, and they'll need that money for something else. In this economy leases can appeal to someone in a flexible or an uncertain situation. … It is generally a more expensive way to acquire a vehicle, but sometimes the flexibility it brings is worth it.”

So how do you get a good deal on a lease? Ignoring the offers you see or hear in advertisements is a good start. The car you'll buy will always vary from the deal you've heard about -- there will be sales tax and license plates to pay for, let alone floor mats, keyless entry and the sun roof. Add in a few extras, and a $199/month deal becomes a $273/month deal very quickly.

Never acquire a vehicle using with the "how much can you pay each month?" method. Instead, go to your bank and negotiate separate financing. Bring that bank car loan blank check to the dealer, which shows the dealer you can pay cash for the car. Then negotiate the out-the-door price. Once that grand total is determined, ask the dealer to make its best loan offer and best lease offer on the car.

"You want to say, ‘I can buy the car for this price, base the lease on that,’" Bartlett said. Working from total price first will always get you a better deal, he said.

When you lease, the total price will be cited as “capitalized cost.” Make sure that price is, at most, the MSRP for the car minus manufactures rebates, your down payment and the value of any trade in.

Finally, Barlett recommends something you rarely hear -- lease a used car. Dealers can arrange financing for 2- or 3-year old cars, and so can other lending institutions. While new-car incentives from manufacturers won't be available to sweeten the deal, that loss is more than offset by the traditional 20 percent or so in value that the car loses the day it's driven off the lot. Leasing a used car can be the cheapest way to drive off feeling like a million bucks. For more:

Herb Weisbaum: “Leasing may only look cheaper”

Edmunds.com example of a lease term

An earlier verion of this story contained an error in the hypothetical calculation of the Ford Fusion monthly cost. Msnbc.com regrets the error.