If you can't figure out how your neighbor drives a Porsche on a Ford Escort salary, here's a possible answer: He may be leasing the car instead of buying it.
Low monthly lease payments -- cheaper than many car-loan installments -- let him live rich even though he's not. In the end, he'll pay more for his cars than if he bought them -- probably 15 to 18 percent more on a three-year lease. And he may be taking some financial risks. But he'll be driving a better car than he otherwise could afford.
You'll be interested in leasing if:
* You have no cash for a down payment on a car, or want to spend your cash on something else.
* You can't afford the monthly loan payments on the car you want.
* You don't drive a lot (for heavy drivers, leasing gets very expensive).
* You're well-to-do and want a lessor to take full charge of getting and repairing your cars.
* You can't get a new-style balloon loan for auto financing (which may be even better than a lease).
An auto lease is a permanent rental; you pay every month and never own the car. There's an up-front deposit, usually covering one or two months' rent. Lessors (banks, car dealers and leasing companies) all have slightly different offers for the same type of car, so you'll probably save a few dollars a month by shopping around.
At the end of the lease term, two things can happen:
On a closed-end lease, you can turn in the keys and walk away (or buy the car at a price arranged when the lease began). On an open-end lease, your close-out cost depends on the resale value of the car. If it sells for more than the dealer expected when the lease began, you pocket the extra money (or apply it toward your next lease); if the car sells for less, you have to pay the difference to the lessor (although you cannot be charged more than three times your monthly payment for an individual, nonbusiness lease).
On both types of lease, you'll owe six cents a mile or more if you drive more than 15,000 or 18,000 miles. You'll also pay extra if the car endures more than the ordinary wear and tear.
Take a good look at what happens if the car is stolen or ruined in an accident. With some leasing companies, you'll never have to pay any more than the deductible in your auto-insurance policy, says Douglas Brown of Enterprise Leasing in St. Louis. But some lessors charge a heavy penalty if you don't drive the car for the full term of the lease, no matter what the reason.
Because virtually all leases carry penalties for early termination, you should be realistic about how long you'll want to drive the car. A four-year lease gives you lower monthly payments. But if you'll be bored sick with the car after 30 months, write a lease for the shorter term.
A common misconception is that leasing offers special tax breaks not associated with owning. But the cost of your unreimbursed business driving is deductible -- and your personal driving isn't -- no matter whether you own or lease the car.
For personal tax breaks, watch the ads to see if an institution near you is offering a nifty new type of balloon loan that, in effect, is very similar to a lease. So far, only a few banks offer it, but I expect it to catch on quickly.
With these loans, you borrow the price of the car, paying interest on the full amount. But you make principal repayments on the difference between the car's price and its expected resale value, which cuts your monthly payment by 20 percent or more. The loan-interest payments are tax deductible, which reduces the net cost for buyers who itemize on their income tax returns.
When you take out the loan, a residual value (the balloon) is fixed for the car at the end of the term. At that point, you can:
* Give the car to the bank (some charge return fees of up to $250, and you'll owe extra money if you drove for more than your mileage allowance or did any unusual damage).
* Keep the car and pay the bank its residual value in cash.
* Sell the car (if you can) for more than the residual value and keep the difference.
Refinance the car and continue to drive it.
Whether you opt for a lease or a balloon loan, the monthly payments probably will be lower than if you purchase a car with a standard new-car loan. But remember that you stand to gain the most if you buy, because eventually you will own the car free and clear.