A glance at the newspaper or a quick click to a local car dealer’s website reveals a dizzying array of promotions and offers designed to entice consumers onto the dealer’s lot, where the well-paid professional sales staff has a better than even chance of putting a person in a new car. Auto sales may be the one place where the average consumer runs head-on into what is called an asymmetry of information.

In other words, the dealer has more information about the price of a new car than the consumer does. The dealer knows, for example, exactly how much the car originally cost, how much it costs to keep that car in inventory and at what price the car can be driven off the lot with a decent profit left behind in the dealer’s pocket.

That does not mean that all dealers are liars and cheats. What it does mean is that when consumers are shopping for a new car, they need to do what they can to gather as much information as possible in order to reduce the asymmetry.

One of the most basic decisions a consumer has to make is to choose between buying a car or leasing one. Carmakers routinely make purchase, lease or financing offers to consumers on a variety of vehicles for a variety of reasons. Dealers sometimes add to these, again for a variety of reasons. We’ll leave the “why” for another time and try to make some sense of the “what” for now.

The choice between buying or leasing a car depends to a large degree on what a particular consumer’s needs and wants are. Typically, monthly lease payments are lower than repayments on a purchase loan for the same car. That means you can lease the car for a lower monthly out-of-pocket cost for the use of the car.

It’s important to think of buying or leasing a car as two sides of the same coin. Both provide consumers with the use of a car in exchange for cash. That’s the simple bit. It gets more complicated quickly.

Regarding monthly payments, loan payments are usually higher than lease payments, according to Consumer Reports magazine, because buyers are paying off the entire purchase price of the car plus interest, finance charges and fees. Lessees only pay for the car’s depreciation during the lease term, plus interest (rent) charges, taxes and fees.

Here’s the example Consumer Reports gives:

For a 36-month loan on a $36,000 car, for example, the principal por­tion of the payment averages $1,000 a month. But with a lease, you pay back only the vehicle’s decline in value—the depreciation—while you’re using it.

Since that $36,000 vehicle might depreciate about $18,000 over that same 36 months, the principal portion of the monthly lease payment would be based on $500, about half as much as for the loan. Of course, at the end of the lease, you have to return the car (unless you come up with the remaining $18,000 of the residual value to buy it).

To the principal consumers need to add finance charges. With a lease, you are paying off the cost of the principal more slowly, which means that you are paying more in finance charges because you are using someone else’s money for longer. Consumer Reports reckons that the 36-month lease on a $36,000 car costs about $1,435 more in finance charges. Some of that is returned by a tax break to lessees, and if you can invest the difference between a monthly loan payment and a monthly lease payment, the difference between financing a loan and financing a lease shrinks further. But Consumer Reports also notes:

Taken together, those benefits might offset the higher lease finance charges. But even then, lessees often have to contend with various fees and other extra costs, including lease initiation and disposal fees, which can add hundreds more to the total cost.

All these additional costs are multiplied if you lease another car whenever your old lease runs out, although some may be waived through lease-loyalty programs.
Consumer Reports concludes:

The financial workings of leasing are so confusing that people don’t realize that leasing invariably costs more than an equivalent loan. And even if they did, the extra cost is difficult to calculate. Still, many people can’t afford the higher payments of a typical loan, at least not without putting a substantial amount down.

One reason that is often given for leasing a car is that consumers can get a nicer ride for a similar amount of money.

We found a four-wheel drive Chevy Silverado LT double-cab pickup with a manufacturer’s suggested retail price (MSRP) of $41,485, including installed options, for sale in the Chicago area. After an initial payment of $4,209 at the time the contract is signed, the lessee makes 39 monthly payments of $319. Other fees of an unspecified amount, including taxes, title and dealer fees, are also due at signing. Sales tax in Illinois is 6.25%, and in Chicago, 10.25%. Only the dealer can tell you for sure how much all these charges amount to (there’s that pesky asymmetry business again), but around $2,000 does not seem out of line. The 39-month lease costs $4,209 plus $12,441 in monthly payments plus $2,000 in other charges, a total of $18,650 or about $480 a month for 39 months. A mileage charge of $0.25 per mile applies if you exceed 32,500 miles when the truck is returned.

A similar Silverado with close, but slightly different options has an MSRP of $45,405 from the same Chicago-area dealer. After all cash allowances are applied, the dealer-advertised price is $39,905. A dealer loan for 60 months at 2.9% yields a monthly payment of approximately $640, assuming a down payment of $4,200. That down payment is probably too low to qualify for the lowest rate, so figure a down payment of $8,200, or about 18% of the purchase price. That yields a monthly payment of about $530 for 60 months.

Coming up with down payment of that size can be difficult for many buyers, and your credit has to be good enough to get that low interest rate.

If you shop hard enough, and have pristine credit, a 0% financing offer might bring the monthly cost of the truck down, but not by as much as you might think. Perhaps only automakers could get away with calling something zero that isn’t zero. The 2.9% loan we used in our example costs about $18 per thousand dollars borrowed, or an interest rate of 1.8%. A 0% interest rate may knock that down to around $16 per thousand dollars borrowed, not exactly zero and not all that much less than the 2.9% rate.

Other things to keep in mind are insurance premiums, costs over the period you plan to operate the car and depreciation. If you lease, you are paying for depreciation every month. If you buy, the depreciation mounts the longer you own the car. You might even find that what you owe on the car on a long payment plan (60 to 96 months) is more than the car is worth if it were to be totaled in a crash.

One more thing about purchasing the car: usually cash back deals cannot be combined with 0% financing. Deciding which is better can be tricky. Here’s an example from auto website Jalopnik:

If you were to finance [a Chevy] Malibu LS with an MSRP of $23,290 with no down payment for 72 months at zero percent, your payment would be $323.47/mo. If you took the $1500 cash [back offer] and qualified for 1.9 percent for 72 months, your payment would be $320.46/mo. Although, if you didn’t get that low APR for 72 months and instead got 3 percent, the payment would jump to $331/mo. In that case you are better off forgoing the cash and taking the zero percent deal.

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The key, according to Consumer Reports, is doing your homework and deciding whether you want to lease or buy before visiting the dealership. Besides Consumer Reports and Jalopnik, another good source is Kelley Blue Book, which calculates a fair value (usually lower than the MSRP) for a car based on where you live.

You need all the help you can get to try to cut down on the asymmetry of information in the car business. By not making the effort you are trading time for money. Most of us have more time than money. That’s why we work at least eight hours a day. It’s worth thinking about.

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