Need for PC speed? A look at leasing

Today's hot hardware is tomorrow's dinosaur. So is the buyer's beststrategy ... don't?

What expensive household purchase depreciates faster than a car and becomes obsolete faster than yesterday's second-run movie?

That new, top-of-the-line computer.

That's why big computermakers such as Dell and Compaq think consumers should be interested in leasing their next machines.

The idea is to let consumers keep up with the latest technology, pay less, and eliminate the hassle of unloading an obsolete computer when a new model arrives.

Essentially, leasing is viewed as a convenience for those who buy a new computer every two or three years.

Dell defines its potential lease customers as part of the TechKnow generation -people who spend a lot of time on the Internet or playing the latest computer games. This group is more comfortable with PCs than VCRs. And it's growing in number as more computer users get wise to the advantages of increased processing speed and memory capacity.

The desire for more speed on the Internet drives computer users to ever newer and better machines, and those are the people who could benefit from leasing, says Richard Curtin, a consumer researcher at the University of Michigan in Ann Arbor.

Computer leasing has already been a boon for small businesses (see story, above right) and traditionally restricted to commercial use. But marketplace pressures have manufacturers and distributors at least thinking of going direct to private users.

"Customers like the flexibility of trading in after two or three years," says says Hudson LaForce, finance director of Dell's consumer division.

Those customers might even save money compared with giving away their old PCs or selling them cheap.

With a lease, their old machines have a guaranteed value from the maker, who has access to markets that want them, such as parts recyclers or overseas buyers.

Other financing options include guaranteed trade-in allowances for used machines when you buy another of the same brand. Or a program like the one pioneered by Gateway, which keeps you in a cutting edge machine for a certain "lifetime" monthly payment, Mr. Curtin says.

Industry experts say computermakers are pushing the leases for several reasons:

*If they can get used computers returned to them, they can recycle some expensive, low-tech components, such as the cases.

*Consumers buy a lot of computers using credit cards -and computermakers want some of that business.

*Since computers have already spread into most affluent and middle-class homes in the United States, new growth is at the low end of the market, where leasing may be more attractive.

An overall savings of even the 20 percent of a computer's remaining value at the end of a lease may be significant for low-end buyers. And "some monthly payment mechanism is helpful to get into low-income homes," says Mike Sargent, vice president of Mercer Management Consulting and the company's high-tech and communications specialist.

But since those consumers won't own anything at the end of the lease, and will have to buy another machine, keeping a computer longer is likely to be cheaper in the long run.

What computermakers are really trying to do is get buyers into higher-end machines, says Mark Cooper, high-tech industry watchdog at the Consumer Federation of America.

"The solution [to getting computers into more lower income homes] is not to find ways to keep financing high-end machines, but to let prices drift down [so computers] become appliances," he says.

And that is what computermakers are resisting, when they push high-end machines, Mr. Cooper says. "They don't want to become a commodity, because they're afraid of what will happen to prices."

When other high-tech goods such as VCRs have become viewed as appliances, prices have plummeted, he adds. PC prices have only drifted down by comparison.

Even Dell concedes its leasing plan isn't for everyone. So far "it's much more popular with business customers than consumers, because they're used to financing things in ways consumers aren't," says Mr. LaForce.

In fact, leasing can be more expensive than financing.

Leasing pays for the depreciation, rather than the entire cost of the good. With computers, "you're talking about such significant depreciation in the first year" that the cost differential is small, says Mr. Sargent.

And leases generally run shorter than financing contracts, so that could mean higher payments.

For instance, a two-year lease on a $2,000 computer, with 8 percent interest, would run about $72 a month (with a 20 percent residual value). Financing the same computer at 8 percent over four years would run only $45 a month.

"The big news for consumers is that the price of PCs is falling and falling," says Curtin.

In fact, as prices continue to fall, computers will only depreciate faster. That could cut into the demand for leased machines.

(c) Copyright 1999. The Christian Science Publishing Society