Ethanol Policy Makes Leasing Look Good

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The Obama administration wants to increase ethanol in gas to 15%, a move that could damage vehicles produced before 2007. Until the situation becomes clearer, some drivers may consider leasing as an alternative to buying a new or used car.

On Oct. 13, the Environmental Protection Agency announced that it will approve the sale of gas containing up to 15% ethanol, a type of alcohol, which is up from the current limit of 10%.

How might this affect your buying or leasing decision? From a purely financial perspective, buying a used car makes the most sense. It leaves the previous owner with the biggest loss from depreciation, which is biggest in a vehicle’s first three or four years. And a vehicle with just three, four or five years on it should still have a good 10 years of service left.

But if you bought a pre-2007 car, would you have problems getting gas for it a few years from now? Today, only about 15% of vehicles on the road were built in 2007 or later, so gas stations are sure to keep selling gas mixes with no more than 10% ethanol. But the percentage of 2007-and-later vehicles will grow substantially over the next few years, and it’s possible that more and more gas stations will emphasize the new “E15”.

Even if there’s plenty of old-style fuel around, pre-2007 vehicles may be less desirable, reducing their resale value. If E15 becomes cheaper than older fuels, then drivers with older vehicles may use it anyway, and those sellers of older vehicles may see less interest in a vehicle that might get damaged by the cheaper alternative.

It may turn out there’s nothing to worry about, as the government is still studying how E15 affects older engines, but if you need to replace a vehicle now, it’s certainly safer to look at cars built after 2007. Unfortunately, the most recent models are more expensive. So it may also pay to investigate a lease.

Although monthly payments are typically much lower on a lease than a purchase, leasing is more expensive than owning in the long run because the payments never end. On the other hand, a leased vehicle is usually new and covered by a bumper-to-bumper warranty, making the lease virtually worry-free. The Buy or Lease Calculator can shed light on the alternatives.

Unlike a car-rental contract that spans only a few days, a multi-year lease is negotiable, and Edmunds.com, the vehicle-information site, recommends some steps for getting a deal that will work best for you.

Typically, the three-year lease is the best deal, Edmunds says. It’s cheaper than a lease for a shorter term but does not exceed the standard warranty.

Be sure to get a sufficient mileage allotment. Many leases allow 12,000 miles per year, 36,000 over three years. Since the charge for extra miles can be very high, Edmunds suggests negotiating a higher allotment up front if you think you might need it.

Most leases require a down payment, or “drive-off fee.” Edmunds urges keeping this to $1,000 or less, noting that some car dealers are currently offering leases that don’t require a down payment at all. Though a bigger down payment may seem affordable, it negates the benefits of a relatively low monthly lease payment.

Finally, be sure the monthly payment quoted by the dealer covers everything, including taxes and other fees. Often these are left off to make the deal look cheaper than it is.

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