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How To Lease an Automobile
Remember that, even as you are building equity, the asset itself is declining in value.
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Business New Haven
11/22/1999
By: Michael C. Bingham
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Despite the rapid growth in the popularity of leasing vs. buying automobiles, there are so many options and so many offers out there it can be confusing to all but the most savvy shoppers.
The first thing to bear in mind is that your decision whether to lease or not is at least as much a financial one as an automotive/lifestyle statement. Many consumers who have come to favor leasing over buying do so hewing to one important financial tenet: You want to own assets that appreciate, and you want to lease assets that depreciate.
There's no question that an automobile is a depreciating asset, losing literally thousands of dollars in value the moment it is driven out of the dealer's lot. On a more practical level, the key advantages of leasing a car are:
• You need much less cash to initiate a lease as opposed to conventional financing, which typically requires a down payment of at least 10 percent of the purchase price.
• For a similar monthly payment, you can lease a much more expensive vehicle than you can buy.
• You can structure your lease term to match your trading cycle. If you buy a new car every three years, you can buy a three-year lease, and then say goodbye to the car forever at the conclusion.
• You can dispose of the leased car at the end of the term by making a payment negotiated at the beginning of the lease.
• Or, you can buy the leased car at the end of the lease term by making a payment negotiated at the beginning of the lease.
Also, if you lease for business purposes, the IRS allows you to deduct the cost of the lease proportionate to the percentage of use of the vehicle for business.
Of course, one key advantage to purchasing your next vehicle is that, as you make payments, you build equity in a real asset. And that certainly fits the financial style and value system of many consumers. But remember that, even as you are building equity, the asset itself is declining in value. With leasing, you pay for the portion of the car's life that you use: the first and best portion.
One common misconception about leasing is that it's not for high-mileage drivers. Sometimes that's true. But even paying a mileage penalty at the conclusion of the lease term is almost certainly less costly than the $3,000 or so down payment you would have paid - up front - to purchase. Also, bear in mind that mileage penalties can be negotiated as part of the original lease agreement.
Important questions to ask when leasing a car:
• What is the vehicle's “capitalized” cost, and what is its residual value? The former term is industry jargon for the selling price - the car's value at the beginning of the lease. Bargain it down as far as possible, just as you would buying a new car. Residual value is what the car is worth at the conclusion of the lease term. The larger the differential, the more you pay in depreciation.
• What is the interest rate, which often is not found even in the fine print of the contract. It is usually expressed as a fraction. You'll have to multiply it to convert it to an annual interest rate.
• Does the lease contract provide "gap" protection? If you have an accident, gap protection pays off your contract when your insurance carrier doesn't provide a large enough settlement to cover the amount you owe on your lease.
• How much do you pay up-front? A deposit equal to one or two monthly payments is unavoidable and eventually refundable. But watch out for a "capitalized cost reduction" payment, which can amount to ten or even 20 percent of the car's value - in advance.
• What will it cost to get out of the lease early? To keep monthly payments down, some dealers steer consumers into a longer lease than they need or want - and then charge a hefty fee if they attempt to escape.
• What constitutes "excessive wear and tear"? Leasing companies must state the kinds of damage charges they may impose on you after the lease ends. Make sure the description is specific, and that you understand the details.
Give those caveats, auto leasing can makes considerable sense. Say you can't afford to buy your dream vehicle, but you're confident you can make the lease payments through the end of the term. Or you're not sure you'll want to keep the car forever, but you'd still love to have it now. Leasing allows you to try it out for a couple of years. If you love it at the end of the term, you can buy it; if you hate it, just drop it off and say goodbye.
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