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Should You Buy Your Leased Car?

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Just yesterday, or so it seems, I was cruising home from the dealership, satisfied with my lease of a 2010 Mazda Miata MX-5 after weeks of searching, hoping, obsessing and negotiating.

Now, 28,000-plus miles later, the three-year lease deadline was nipping at my heels, and I'd become a very popular customer. My stack of letters and saved voicemails from Mazda and the bank that holds my lease proved that.

The first letter arrived nearly six months before my lease's expiration date. It offered me $500 in owner-loyalty cash to buy or lease a new car from Mazda, then spelled out my options: Purchase or extend the lease on my current Mazda, replace it or return it.

With plenty of time and a journalist's deadline mentality (why do anything early?), I did nothing but continue to enjoy driving my car. Soon, though, it was more difficult to ignore the growing pile of letters and the accumulating voicemails:

"Are you ready to schedule your inspection for your lease turn-in?"

"Have you made a decision?"

The pressure was on.

Buy My Leased Car or Go With Something Else?

My gut said: "Buy the car!" It's beautiful: Copper Red Mica with a blonde-tan top. It's the Grand Touring trim level with heated leather seats and the Premium package that includes stability control, keyless ignition and entry, xenon HID headlights, Bluetooth and satellite radio. A spin with the top down, however brief, delivers the same punch as a good workout, meditation or an hour in therapy.

Yet I knew I had to factor in practical information. For help, I turned to Philip Reed, senior consumer advice editor at, and Tarry Shebesta, president of Lease Compare. along with my Mazda dealer, bankers and other number crunchers. Here's how the decision unfolded. And yes, I made the deadline. By a hair.

Compare Two Very Important Numbers

''The first thing to do is look at the lease contract and find out what the car's residual value is," Reed tells me. This is the guaranteed price for which you can buy the car. I got out my contract. My car's residual value was $15,330.

"Generally speaking, the residual is the estimate of what the car will be worth at the end of the lease," he says. "Companies have gotten really good at figuring out what a car is worth after three years." However, leasing companies sometimes get it wrong, he says, because there are unforeseen market conditions, such as the long, deep recession.

That's why the next important number to find is the car's current value. Edmunds calls this a vehicle's True Market Value ® (TMV ® ). You can easily use it to appraise a used car.

Reed tells me to look at the private-party TMV price for a quick snapshot of what the vehicle is worth on the current market. If the residual and private-party TMV numbers are within $500 of each other, Reed says, the lease buyout is a good deal.

Even if the residual is more than the private-party price, buying your lease car offers some advantages. You know the complete history of the car because you've driven it since it was new. Also, you don't have to search for (and negotiate for) another car, which many people dislike doing.

I do the math on the Miata. Good news! With adjustments for accessories and mileage, the private-party price is $18,587: $3,257 more than my residual. That means my residual price is a great deal. It also represents $3,257 worth of equity in the car, and if I'm so inclined, I now have some ways to turn my lease into cash .

More on How To Interpret the Numbers

The comparison of the residual to the car's market value ''will almost guide you to the path you will take," Shebesta says. ''If the market value is lower than the purchase option, in most cases you are going to walk away."

There are exceptions to that rule, however, he says. If

you know and like the car, have had it serviced regularly and know it's in good operating condition, "there is value to that," Shebesta says.

If the residual value is higher than market value, you have more leverage in negotiating a better buyout price, he says.

"If the residual is higher than the market value, they want you to buy it. If the residual is lower than the market value, they are going to want it back," he says. "They can sell it for market value and pocket the money."

That might explain why I've gotten so many phone calls, telling me how much I really, really deserve to move on up to a 2013 Mazda.

How, When and What To Negotiate

So, even though the residual value on my car is lower than the market value, is there any room to negotiate an even lower buy-out price? That's likely to be difficult, my experts warn me.

Still, I try. Twice. No luck. "The residual is the residual," I'm told.

Scanning the lease agreement, I see a ''purchase option'' fee of $150. I'm stunned that I'm expected to pay for the privilege of exercising my option to buy the car. It's one of those anomalies of the car-buying and car-selling world, says Reed. "Where else would a merchant charge you for buying something?"

But, as Reed says, a lease comes with record keeping and paperwork, not to mention the hours spent contacting end-of-lease foot draggers like me. I could make my purchase offer contingent on waiving that fee, but it's likely to be a losing battle, Reed says.

I tried, twice, to persuade the bank to drop that fee, but was turned down flat. So much for appreciating customer loyalty.

Although I couldn't negotiate down the residual value of my Mazda, some leasing companies will haggle, Reed says. In most cases, captive finance companies (lenders who only make auto loans for a particular brand) will not negotiate. If a bank or credit union has written the lease, they might negotiate.

"A tipoff is if the leasing company calls and offers to sell the car to you," Reed says. "This seems to indicate a willingness to negotiate which you can exploit" by asking for an even lower price.

Buying Time

With the financial logic syncing with my heart, I was pretty sure by this point I'd buy the car.

If, however, you're doing a deal like this and are not sure at this point, you can take advantage of the procrastinator's special: the lease extension. I could have extended my lease for up to five months with nothing more than a simple request. You continue to pay the same monthly lease amount until the time's really up.

Meanwhile, until you decide to extend or buy out the lease, those letters and phone calls may just keep coming. I'm pretty sure the bank had me on speed dial while I debated.

Finally, one caller told me I could request them to not call back until a certain date, or give them a date by which I would call back.

Shopping for a Better Loan Deal

And then I finally did make the call. While some people prefer to plunk down all the cash at once for a car purchase, I am notoriously bad about paying back my own savings account. I decided to finance the car's purchase with the lowest-interest loan I could find.

The leasing agent couldn't wait to offer me a lease-to-loan option: at 3.91 percent. With some Web surfing and calling, I found a sweet 2.24 percent, 48-month loan through my credit union. Interest totals about $200 annually.

After a few more decisions about whether to add life insurance (no), disability insurance (no) and Gap insurance (initially yes, out of a surfeit of caution, and then no), I signed the papers.

I've always thought that everyone needs to own at least one red car. And this one has lots of joy left in it yet.

Category: Credit

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