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Leasing

Look at the classified advertising section of any newspaper. Watch automotive television advertising. What do you see everywhere? Car leasing ads. The car manufacturers are pushing leasing, with the dealers right behind them. Why? As prices for new cars kept rising throughout the 1990's, it became obvious that prices would soon be out of the reach of many car buyers. The math is pretty simple. A $25,000 car, financed over 60 months, with taxes, tags and fees as a downpayment, converts to a payment in the $500 per month range: not even a possibility for large numbers of consumers. Leasing, by lowering the monthly payment (for example, to perhaps $350 per month) puts that $25,000 car into the range of a lot more buyers. Hence, the push for leasing. The manufacturers and the dealers sell more cars (and if you aren't careful, for more money). The big question is, though, is leasing going to be good for you?

A Leasing Primer

When you buy a car, whether is is paid for in cash or financed, you commit to pay for the entire car. You may be spreading the payments out over 5 years, but the payments will be based on the full leasing a carselling price of the car. With leasing, it works differently. If, for example, you lease a car for 36 months, you only pay on the amount of the car that will be "used" during those 36 months. It is assumed that the car will be worth a certain amount in 3 years, and that amount--the residual value--is deducted up front. The balance is the first determining factor in your lease payment. In addition, since you will have use of the "whole" car, you will be paying a fee for the use of the money that is represented by the car. Since the residual factor is not figured into the depreciation portion of your lease payment, the lease payment will be less than a purchase payment for an equal number of months.

2 Important Factors Regarding a Lease

1) You are not buying the car--the lease company is.
2) You will not
own the car--the lease company will.

These two factors are important because, in general, the lease company will pay whatever the dealer wants them to pay for the car. Unless you keep a close eye on the entire transaction, your lease may be based on a price that is at or close to M.S.R.P.--sticker price. Since you do not own the car, the lease company has the right to tell you how you use, maintain, and insure the vehicle.

Is Leasing for Me?

To determine whether or not leasing is a viable alternative for you, you need to do a little self exploration of your needs and your car buying habits. Does any of the following apply to you?

  • I tend to bore easily with cars.
  • There a chance that my income situation may change for the worse in the next few years.
  • I tend not to take good care of my vehicles.
  • I usually am not religious about maintaining my cars.
  • I usually drive in excess of 15,000 miles per year.

If any (or all) of the above seems to apply to you, in the vast majority of cases leasing will not be a good alternative. Why? Because a lease contract is more stringent and imposes more requirements than a financing contract.

For example, when you commit to a 36 month lease, you commit to the use of that vehicle for the full 3 years. Changing your mind and wanting a new car--whether in 6 months or in 2 years--is a very expensive proposition. When you "get out of" a lease, you are, in effect, breaking the contract. The lease company will punish you for doing so, and they punish with your dollars. If you finance a car and are unable to make the payments, you may have the option of selling it and getting out from under the balance. With a lease, you cannot easily do that--you don't own the car. In addition, since someone else (the lease company) actually owns the car, they will expect and require that you keep their car in good condition. If you don't, they punish (and now you know what they punish you with!)

When you lease a car, you will be limited in the number of total miles that you can drive it. Generally, the mileage limit will be in the 12,000 mile per year range (for example, a 3 year lease would limit you to a total of 36,000 miles). You can "buy" extra mileage, either at the onset or the end of the lease, but the extra miles don't come cheap. If you drive in excess of 15,000 miles per year, the extra mileage charges negate most or all of the payment advantage of a lease. Waiting until the end of the lease to settle up on the excess mileage can mean a horrendous charge to turn the car back in.

Unless you know exactly how many miles you will be driving during the next few years, DON'T LEASE! If you go over the limitations, the mileage charges will eat up the savings you made while leasing.

If you can live within the parameters of the lease, it may allow you to get more car for less money per month. There are still, however, a number of pitfalls that you need to watch out for in order to get the best leasing deal.

Always negotiate the selling price of the car upfront. Do not negotiate strictly on payments! The lease can always be "engineered" to fit your payment while inflating the profit for the dealership. The selling price will be referred to as the "capitalized cost." This is the amount that the lease company will be paying for the car. It is also the biggest determining factor as to what your payments will be. Make certain that every dollar of the selling price is disclosed to you and compare it to any price quotes you have been given.

Don't let them put you to sleep on the "money factor"
. This is what the leasing company will be charging you for using their money for the term of the lease. It is, in effect, interest. The money factor will be expressed in a format similar to ".00XXX", for example, .00325. For an estimate of the interest rate, multiply the money factor by 24. In the example, 24 x .00325 = .078 which converts to approximately a 7.8% interest rate. Never pay a premium for the money. The interest rate attached to a lease should be roughly in the same range as current financing rates.

Beware of artificially high or low residual values. The residual value is the amount that the lease company determines the car will be worth at the end of the lease. A low residual value equates to higher payments during the term of the lease. A high residual value means your payments will be less, but the car will cost more at the end of the lease term should you decide to buy it. Obviously, if you have no intention of buying the car at the end of the term, a higher residual value is in your best interest when it comes to computing payments.

Don't make large downpayments on leases. The only value of a large downpayment is to lower your monthly payments. You are not enhancing your equity position (you have no equity--remember, you don't own the car). Once you ante up the downpayment, it is gone forever. One of the biggest advantages of a lease is its lower upfront cash requirement. Don't negate this benefit by pouring a big downpayment into a lease.

Watch all the numbers. Examine all of the lease documents line by line. Verify that the selling price (the contract will say "capitalized cost") is the number to which you agreed. Convert the money charge factor to an interest rate (multiply by 24) and make sure that it is fair. Verify the residual value. Know upfront what any "early termination" penalties may be. Be wary of any "junk fees" that may be slipped into the lease. In a couple of words: be vigilant.

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