A lease IS a loan. The methods may differ between them: for example, a loan is usually paid monthly in arrears (at the end of the month) while lease paymensts are made in advance ( at the beginning of the month), but they all have effective interest rates, down payments, monthly installments and terms to completion. Leases and loans can be compared by doing an appropriate present value analysis on the stream of payments to me made, including any balloon (buy out) payments at the end.

While many leases have walk away clauses at the end, I would never get into a lease that forced me to relinquish the leased item (car) to the leasing company at the end of the term. In many cases, if the lease is well constructed from the start, the vehicle can be bought out at the end of the lease and then re-sold for more than the buy-our price.

Where leases can be a problem is with the potential for hidden administrative fees and the like that can go with them. Ask the hard questions first and evaluate the resulting stream of cash flows.

Where leases look like they have a potential advantage is with respect to sales taxes. Here in Ontario, Canada, where we have a 7% Federal value added tax (GST) and an 8% provincial tax (total 15%, not compounded) the tax hit on a $40,000 car is $6,000. If you buy the car outright (using a loan) you have to pay the tax up front. BUT you don't pay taxes on the loan installments as you make them.

With a lease, the tax is paid along with the lease payments as they are made. But then again, you are paying tax on the effective interest component of each lease payment as well. Check the cash flow outcomes.

As for me, I have always bought my cars, selling the previous ones privately and using the funds as a down payment. I arranged the necessary financing through my bank because it was cheaper than lease financing rates. When the loans were paid, I owned the vehicle and made no further payments. This works great as long as you plan to keep the car longer than the term of the loan.

With my BMW, however, bought in August 1997 I entered into a lease because the lease rate of 1.9% was an effective interest rate much lower than I could borrow in the bank. In fact, I minimized my "down payment" so that I could maximize the principal amount of the money I was effectively borrowing at 1.9%

Sorry for the rambling.

• -- AJ (Alan Jaskolka) Toronto, Ontario, Canada

Mailto:jaskolka_at_ees.ca

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