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Car Leasing Tips
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Leasing was originally intended for
businesses that wanted to avoid the high
cost of vehicle ownership and maintenance.
As new car prices kept edging upwards more
and more, leasing became a new way of
“selling” cars. Now, you need to understand
what it really means and what you get (and
don’t get) for your money in a lease.
Automobile leasing is not a simple matter. Cars depreciate
in value over time. When you lease a car for two or three
years, you are paying for the depreciation in monthly
payments plus interest. At the end of the lease, the
automobile can be either sold to you or someone else for its
value at that point. There is no ownership, you simply pay
for the use of the automobile. The manufacturer's warranty
still covers the car for you whether you lease it or buy it.
The law requires disclosure by leasing companies of specific
information and provides consumers with a description in
writing of the lease's financial details. The purpose of the
law (called “Regulation M”) is to allow consumers to compare
one lease with another for the same vehicle and to compare
leasing a vehicle with buying it on credit. However, the
disclosure requirements do not apply to lease transactions
over $25,000.
LEASING
TERMS YOU NEED TO KNOW
LESSEE: The consumer.
LESSOR: The company that owns
the automobile (usually the bank or finance company).
GROSS CAPITALIZED COST: The
price of the car for leasing purposes. You want this number
to be as low as possible.
CAPITALIZED COST REDUCTION:
Amount of cash down payment, trade-in or rebate.
RESIDUAL VALUE: The automobile's
value at the end of the lease. Sometimes called “lease-end
value,” this is often described as a percentage of the
Manufacturers Suggested Retail Price (MSRP). The higher the
residual value, the lower your monthly payment will likely
be. The residual value may be a negotiable figure. To
determine it, many dealers consult a publication called
Automotive Leasing Guide but some banks use their own guide
book. Ask to see it if you aren’t sure that you are getting
a fair deal.
RENT CHARGE: An amount paid by
the lessee that usually includes principal, interest and
profit.
MONEY
FACTOR: This figure, also known as the lease rate, is
the interest rate built into all leases. It is leasing's
version of the rate of interest that is charged to people
who buy on credit. Leasing companies do not usually disclose
the money factor except to the Dealer.
ADVANTAGES
OF LEASING
1. The monthly payment is always lower
than when you buy the same car. Also, in many cases you
don’t even have to pay any down payment to get the car.
2. A short term lease lets you get a
new car every couple of years and you can usually get a more
expensive car than you could if you were buying it instead
of leasing it.
3. Before the car gets worn out and
needs repairs, your lease is up and you may have avoided
repair bills.
4. There is
no hassle with a trade-in at the end of the lease.
DISADVANTAGES OF LEASING
1. You may all those payments and at
the end of the lease you have nothing to show for it because
you don’t own the car.
2. If the lease is longer than the
car’s warranty, you may have to pay for repairs at the same
time you are making payments.
3. In the long run, leasing is more
expensive.
4. It’s
costly to get out of a lease. Early termination of a lease
will likely result in very substantial charges that you have
to pay.
STEPS IN
AUTOMOBILE LEASING
1. Get informed. Chose the car you are
interested in first and research its reliability and price.
Next start talking price. Make sure you know what your trade
in is worth and then negotiate your trade in allowance to
the highest number you can get.
A 2 year lease usually means larger
payments. A longer lease should have smaller payments, but
could end up costing you even more if you try to get out of
the lease early.
2. Negotiate the gross capitalized
cost.
Try to negotiate a gross capitalized
cost somewhere between the window sticker price and the
dealer’s invoice cost (ask to see it). The lower the “cap
cost,” the better the deal usually is for you. If the
salesperson claims that he/she is not allowed to negotiate
the capitalized cost, they are not telling you the truth so
just leave and go to another dealership.
On the lease form itself, when you see
it, compare the number you negotiated with the capitalized
cost the dealer wrote down, to make sure that nothing has
been added.
3. Fill in the lease “disclosure”
form.
Ask the salesperson to fill in the rest
of the lease disclosure form, front and back, and give you
the figures. Be sure that you check the box near the top or
middle of the front page in order to get a step-by-step
calculation of the monthly payment.
4. Review the lease form.
Review the lease and ask for
explanations of any items you do not understand. Make sure
that you get credit for your trade-in allowance. Look for
the line on the form titled “capitalized cost reduction.”
The total amount should include rebates, cash down payment
and trade-in allowance. If you have paid a down payment or
deposit, make sure you get credit for it, too.
5. Take the lease home and read it
carefully.
Once the lease is written, don’t sign
it on the spot. Instead, ask for a copy to take home and
review more carefully. A quick signature at this point could
cost you thousands.
6. Compare the numbers.
At home,
compare the figures on the lease with your notes about what
the salesperson said the car would cost you. Look for
unexplained changes or charges you don’t understand. Check
the math. Look carefully at the lease term, the gross
capitalized cost, the capitalized cost reduction, the
residual value and the monthly payment amount (the “rent
charge”).
END-OF-LEASE COSTS AND OTHER CONSIDERATIONS
When you buy
an automobile, the bargaining usually comes at the beginning
of the process and in the finance office. Leasing is usually
pretty simple at the beginning but can get very complicated
at the end. When you turn the car in, problems can happen,
if you don’t know what you are getting into. Read the fine
print (every word of it) before you sign on the dotted
line.
SOME OF
THE MORE IMPORTANT THINGS TO LOOK FOR ARE:
EXTENDED WARRANTY (called
service contracts). If you really must buy one, make sure
that it is a “real” one from the vehicle’s manufacturer and
not from some post office box company with an 800 number.
Also, negotiate the price. Usually about half the cost of
the extended warranty’s starting price is pure profit to the
dealer.
GAP INSURANCE. Many people think
Gap insurance is a rip off. If the lease car is totaled or
stolen, your auto insurance may cover replacement but not
the payments still required. Gap insurance covers the
difference between the replacement value of the car and what
is still owed on the lease. It is expensive for what you
get, unless (of course) you really need it. Bargain over the
price here, too, since about 30 to 50% of the asking price
is more Dealer profit.
EXCESS WEAR AND TEAR. At the end
of the lease, if the car has visible damage, you will
probably be charged for repairs. To protect yourself, get a
copy of the written guidelines or checklist issued by
leasing companies.
EXCESS MILEAGE. The yearly
mileage limit on your lease should be higher than your
normal driving habits. If it is not, find out the charge for
the additional miles. Try to negotiate a more favourable
rate for added miles at the outset.
DISPOSITION FEES. This
end-of-lease charge covers costs associated with picking up
and processing the returned car are for sale.
PURCHASE OPTION. This is your
chance to buy the car at the end of the lease. The lease
should tell you how the price will be figured (if the
purchase price is pre-determined or you can negotiate it at
the end of the lease).
EARLY
TERMINATION AND DEFAULT . You may incur significant
penalties if you break the lease. For example, you may be
required to pay 100% of all the remaining payments. A
detailed explanation of early termination fees is required
by the disclosure form. Never believe a salesman who tells
you that there is no penalty for ending your lease early. If
you lease a car, you might as well plan on keeping it to the
very end of the lease.
SOURCES OF
ADDITIONAL INFORMATION
Consumer's Auto Leasing Guide, Remar
Sutton, Credit Union National Association. A 30 - page
booklet (costing $8.50) explaining what a lease is and all
important facets and terms of a lease. Include stock # 20669
in your request. Finance Department, CUNA & Affiliates , P.O
Box 431, Madison, WI 537021-0431. 1995.
Dodging The Traps In a Car Lease.
(April 1996). Kiplinger's Personal Finance Magazine , pp.
89-93.
Reality Checklist. Consumer Task Force
for Automotive Issues, Inc., P.O. Box 7648, Atlanta, GA
30357-0648. 1994.
Lease your Car For Less, Richard L.
Kaye, TeleTravel Network, P.O. Box 606, Northbrook, IL
60062-0606. $6.95. 1995
Look Before You Lease, Michael Kranitz,
Buy-Rite Publishing, Damonmill Square, Suite 5A4 Concord, MA
01742. Telephone: 508-371-0015. $9.95. 1997
What You Should Know About Auto
Leasing. (June 1995). Consumer's Research, pp. 27-29.
Software
Expert Lease and Expert Lease Pro
Software. Chart Software, PO Box 145, Gilman, IL 60938.
800-418-8450. $49.95 and $99.95(Expert Lease Pro). System
Requirements: IBM compatible PC with DOS 3.1 or higher. 640K
memory, color monitor, hard disk with 4.0 MB free(Pro
version). 1995.
World Wide Web
Automobile Leasing: The Art of the
Deal, Al Hearn 1996.
www.mindspring.com/~ahearn/lease/lease.html
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