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Monday, March 23, 2015

Advantages and Disadvantages to Leasing a Car

I’ve written many articles on leasing, most of them cautionary. Car dealers and manufacturers prefer to lease you a car because, on the average, they make a lot more money when they lease you a car as opposed to selling it. Before I get to the “advantages” of leasing, here are some of the disadvantages. 

When you lease a car the leasing company, often owned by the manufacturer, owns the car, not you. This means that you must return the leased car at the end of the lease to the car dealer you leased it from. This gives the manufacturer and dealer a chance to lease or sell you another car. You will begin to be contacted by the car dealer and leasing company several months before the expiration of your lease making you “special offers” if you lease or buy another car from them.

Leasing is a far more complicated transaction than buying a car. Some people believe, or are lead to believe by the salesman, that leasing is the same as renting; if you don’t need the lease anymore, decide you don’t like the car, or are ready to lease or buy another car all you have to do is bring it back to the dealer. That is not true. When you sign a lease contract you’re obligated for the total number of months of the lease…be it 36, 48, or 60. If you’re lease payment is $400 per month, you owe the leasing company $24,000 even if you keep that car for only one month. 

There are several things hidden in the fine print of a lease contract that are rarely fully disclosed to the lessee. In addition to the monthly payment and down payment you make on a lease, there is fee charged by the lessor (and sometimes a portion is returned to the dealer) commonly called an “acquisition fee”. This is simply profit to the lessor (and sometimes dealer). A typical lease acquisition fee is about $900. When you turn in the lease there’s another fee commonly called the “disposal or disposition fee”, usually around $350. 

Another hidden cost of your lease is the charge for driving over the allowed annual mileage. The amount of mileage allowed varies from as little as 7,500 to about 15,000. The charge for driving over this varies from as little as $.15 to as much as $.50 per mile. Imagine not knowing that you signed a 60 month lease contract allowing only 10,000 miles per year and charging $.50 per mile for each mile above that. If you’re an average driver, you drove 15,000 miles per year and in 5 years you put 30,000 more miles on your lease car than was allowed. You owe the leasing company $15,000!

The leasing company insists that you take good care of their car. They will allow you to inflict only “normal” wear and tear and they define what they mean by “normal” in the lease fine print. The definition is more subjective than specific. It’s not unusual for leases to get a bill in the mail a few weeks after they return their lease car for several hundred dollars. 

The lease transaction is more complicated than a purchase transaction. The monthly payment is calculated from an interest rate that is camouflaged as a “lease factor” and the predicted value of your car at the end of the lease known as the residual value. These variables are applied to the “capitalized cost” usually abbreviated cap cost. The capitalized cost is close to what the price of the car would have been if you bought it. Many people don’t understand this and sign lease contracts for cars with capitalized cost at MSRP and higher…something they would never do if they bought the car. 

If you trade in your old car when you lease, this is supposed to reduce the capitalized cost of the lease, just as it would if you purchased the car. It happens all too often that the car dealer will not allow the full value of your trade-in in reducing the capitalize cost or even not allow anything! I’ve talked to many victims of this practice who paid the car dealer profits of up to $20,000. 

If I haven’t totally frightened you away from leasing a car, there are some advantages. The first is that, if your car is involved in a collision, you don’t have to worry about its diminished value when you turn it back in. If you owned the car and had a serious collision that required extensive repairs, you would suffer diminished value of several thousands of dollars when you traded in or sold your car. You must be sure that you have your car properly repaired by a good body shop. If you don’t, the leasing company will come after you for money to make the repair right. 

Another advantage is exercising your option to buy your car at its residual value at the end of the lease and the right to “walk away” with no obligation if the residual is higher than the actual market value. This option exists in all lease contracts for closed end leases. Almost all retail leases today are closed in, but there are some dealers leasing cars which are “open ended” that make you responsible for the residual value being less than the leasing company can wholesale the car for. NEVER sign an open ended lease. 

There is one more advantage to leasing and that is that manufacturers/leasing companes will often “sweeten the pot” toward the end of your lease to keep you leasing from them. You will begin to receive offers about 6 months before your lease terminates which can include waiving some of the remaining lease payments, waiving the lease termination fee, and special lease payments on the new model. 

The bottom line is that, if you are a sophisticated buyer/lessor that does their homework, leasing can be the best option for you. You must read the fine print of the lease contract and understand it. You must realize that you are obligated for costs of any wear and tear on your car above “normal”. You should know the amount you must pay for your “acquisition fee” and “disposition fee”. You must be sure that the capitalized cost equals the price you would consider fair if you were to buy the car. You must know that the full and fair value of your trade-in was applied to reduce the capitalized cost. You should verify that the allowed annual mileage falls within the number of miles you will put on the car.

2 comments:

  1. My brother is a dedicated Jeep owner. Even if we try to persuade him to buy another type of vehicle, he is also a veteran and dedicated to always having a Jeep.

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  2. Bo's, your brother is doing the right thing by buying and driving the vehicle that gives him the most pleasure and satisfaction. We humans are not computers (at least not yet). We do some things because "we feel like it" and sometimes those actions aren't based on analytics and facts. This gets us into trouble sometimes but sometimes it gives us the greatest amount of satisfaction. I wouldn't want to be live like a computer and neither would you.

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