Q: My husband and I have really started getting serious about getting out of debt. About 2 years ago we decided to lease a maxed out Suburban. It is our only vehicle so we justified the $507 payments with that logic. It has been a wonderful car for our family of five. But, we are trying to decide what our best strategy should be now that our lease will be over next April, and we now have 70,000 miles on the vehicle. On top of that, my husband now needs a vehicle because of a job change. The "buyout" at the end of the lease is around $25K. We know we now have upside down equity in the thing. My husband has a small bonus coming and we are trying to decide if we should or could
trade it in for a used vehicle with less mileage and pay out the penalties. Or, ride out the lease and pay out the penalty next April and turn the keys over then. Buying the truck/car next April for $25K with probably 100,000 miles on it seems a "bit pricey." We finally have carved a budget for our family and are paying off bills, but this is a question we can't seem to get answered. Could you help us?

~ Mary

A: Mary has discovered one of the secrets of auto leasing. Often the deal looks much better at the beginning than at the end. And, unfortunately for her, the end of this lease could get ugly. And Mary's not alone. About one third of all new cars delivered in 1997 were leased. So let's take a look at the situation and see what choices Mary has and try to figure a way to compare them.

First, let's consider the basic data. Mary's family needs a second car. That probably means that a 'maxed out' anything is out of the question. They're also facing some hefty excess mileage charges. Depending on their lease the charge could be in the $6,000 range. Finally, if they want to end the lease early there will be a penalty to pay.

There are four different options for Mary. The first would be to turn the Suburban in early. If they do that they'll face the early termination fee. They would get out of a car that they can't afford sooner. And it's possible that the dealer would waive the termination fee if they bought the replacement car from the same dealer.

The second alternative is to buy the car from the dealer at the end of the lease. Mary will face the excess mileage and wear charges. Assuming that she can find a four year 10% loan, the monthly payment will be $634 on a $25,000 loan.

The advantage would be that they know and like the Suburban. Normally you wouldn't touch a 3 year old car with 100,000 miles, but they know that this car has had an easy (if busy) life. It's also likely that they won't have to actually pay $25,000 for the car. Much of the excess mileage and wear fees should be applied to reducing the cost of the vehicle. In reality, it should cost more in the $21,000 range. But, that's up to negotiating with the dealer. The disadvantage of buying the Suburban is that it's more car than Mary's family can afford.

The third alternative is to turn in the Suburban at lease end. Pay the excess use fees and walk away. That would allow Mary to buy something less expensive. For instance, a 1997 Ford Taurus four door wagon with 45,000 miles and typical equipment retails for about $13,700. A four year loan on this car would run $347 a month. Is the Taurus a 'step down' from the Suburban. Sure it is! But maybe it's what Mary's family can afford. The disadvantage is that if the dealer knows that you're not going to buy from them they'll get all they can on the wear and tear charges. Some minor flaws could be overlooked if Mary were buying or leasing another car from the dealer.

The fourth choice is for Mary to buy the Suburban at lease end and then sell it herself. It could be that the car is worth more on the open market and Mary could make some money on the deal. Not likely because of the mileage, but it pays to check it out.

Which option will be best for Mary and her family? Probably to turn in the Suburban at lease end. If they've just been able to fit the $507 Suburban lease payment into their budget, it's going to be hard to cover the cost of two cars. To illustrate, if they found two cars for $10,000 each and financed them both over four years each would have a monthly payment of $254. Combined that would equal the Suburban lease. Of course, there's still additional insurance, registration and maintenance on the second car to consider. And it might be hard to find two used cars that can be financed over a four year period. In any case, two less expensive cars would seem to make sense.

The one wild card in this deal is the value of the Suburban. With that many miles it's a bit of an oddball. Using blue book retail price for a 1997 Suburban with that mileage I got a value of about $22,000 depending on options. It will be worth less next April. It could be that the dealer is willing to adjust the buyout substantially or that Mary knows someone who would really like to buy her car. But, it seems highly unlikely that they should buy the Suburban and keep it.

Should they use Hubby's bonus to terminate the Suburban lease early? Probably not. Even if they saved half of the $507 monthly lease in a cheaper car for the next nine months ($2,281), they'd give most of that back in early termination fees unless the dealer would waive the fees on a trade-in. The bonus should be used for a down payment on a replacement or to cover the excess mileage charge that will come due at the end of the lease.

Sad to say, but Mary was a poor candidate for the lease they signed. Leases are generally best suited for businesses or people who can afford a new car every few years. And they're especially bad for people who drive mega-miles yearly. Lease deals usually look better at the beginning (low monthly payments) and worse at the end (mileage penalties and you don't own the car).

At this point Mary needs to make sure that they'll have enough money saved to pay the penalties that will be due at the end of the lease. If they can cut down on the number of miles they drive that could be helpful. She'll also need to consider carefully how much they can afford to spend on cars and how old a car they can drive. It's possible to own a car for $300 per month, but they'll need to think of smaller, less expensive cars and/or plan on keeping a car for seven to ten years.

We hope that Mary finds two cars that make her family happy and fit within their budget.

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