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PIT Benefits of leasing can be murkier than buying

By Eric Evarts

cars.com

Most consumers understand the buying process. Leasing, however, can be a bit murkier. Before we talk about the benefits of leasing, let's review how it works.

Michael Kranitz, creator of LeaseWizard.com software and author of "Look Before You Lease: Secrets to Smart Vehicle Leasing," explains that lessees are paying for two things in any lease deal: the car's depreciation and the cost of money. Depreciation is merely the difference between the car's capitalized cost and its residual value. The capitalized cost is made up of the negotiated purchase price and whatever other taxes and fees you elect to fold into the lease, while the residual value is the vehicle's predicted wholesale value at the end of the lease term.

Residuals are a key determinant of your monthly payment. Higher residuals mean lower payments, but they also mean the car will be more expensive if you elect to buy it at the end of the lease.

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Consumers pay a money factor -- consider it a rental charge that allows lessors to make a profit.

Now, what are the benefits?

Leasing benefit No. 1: Driving a new car.

Leasing allows consumers to always have a new or late-model car in the driveway. Another benefit of driving a late-model car is fewer repair bills.

Leasing benefit No. 2: Cash flow.

Leases are attractive to many car buyers because they can get more car for a lower monthly payment. How's that possible? Lessees only pay for the depreciation on the car, not the entire vehicle. In effect, they're renting the car for the length of the lease.

Leasing benefit No. 3: Subvented lease deals.

More automakers are starting to offer incentives on leasing rather than big cash-back offers to those who buy. Such leasing incentives are called lease subvention.

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Manufacturers subsidize, or "subvent," leases to find customers who will buy slow-selling models.

Leasing benefit No. 4: Avoiding negative equity.

Even with today's incentives, many buyers are signing up for car loans of six and seven years. At that rate, the car will depreciate much faster than equity builds. In the industry, these purchasers are known as being "upside down."

For more information on leasing, go to www.cars.com.

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