Initial Costs. Leasing has always had one big advantage over an auto loan: Lower initial cash expense. With a lease, there is generally a very low initial cash requirement - little or no down payment - to get you behind the wheel of your new car. If you have a limited down payment or no vehicle to trade in, leasing allows you a more reasonable payment than a loan. If you can afford a bigger down payment, your monthly payments will be reduced even more. Generally speaking, the better your credit rating is, the lower your cash requirement at the start of the lease.
With a lease, you will ordinarily be asked to pay a refundable security deposit along with your first monthly payment. Sometimes, based on credit or your option, you will pay a "capitalized cost reduction" or down payment. Just like most leasing terms, however, this can be structured to meet your needs.
Equity and Ownership. An auto lease provides you no equity. At the end of an auto lease, you do not own the car and you have no equity built up as you would if you purchased the car. However, if the car sells for more than your end of term wholesale value, the equity from the sale IS yours. With a loan to purchase a new car, you gradually build equity with every payment. You may want to consider how much you will pay to build this equity, over the course of the loan. It is possible that the car may be worth far less than what you paid for it, when the car is fully paid off. Owning a car is an asset, however, it is a continuously depreciating one. Many drivers would prefer to invest their money where the returns may be higher.
Taxes and Insurance. Most of the tax breaks that had existed at one time for purchasing a car, no longer exist. New tax breaks for leasing are available, however. In certain business situations, your down payment for a lease may be tax deductible. Please consult with your accountant for details. In most states, when you buy a car, you are required to pay all of the sales tax up front. When you lease a car, you can spread the sales or usage tax out (amortize) over the course of your lease in most cases.
Unlike buying a car, you are required to purchase higher limits of insurance when leasing, for both public liability and property damage - collision and comprehensive. However, wouldn't you protect any new car with this coverage?
Other Differences. There are potential end of lease costs such as additional wear and tear or excessive mileage that you would not incur with a loan. You may also pay a penalty for early termination of the lease. Although, because of the structure of leases, monthly lease payments can be lower than loan payments - less out of pocket every month. Lower payments could give you the luxury of additional options or a more expensive model than you could afford with a loan.
Also, consider how often you would like to drive a new car. Auto leases have shorter terms than auto loans. If you would like to drive a new car every two to three years, a lease gives you that flexibility.
Auto leasing is more popular than ever - leasing has grown ten times since the mid-eighties. In fact, 28-35% of the 15 million-plus cars sold in the United States are leased. Why is car leasing so popular? What are the advantages of auto leasing?
Pay for What You Use
Auto leasing is a simple idea. You only pay for what you actually use. When you lease a car, you only pay for the amount of the car's value that you are actually going to use, plus the interest. Why pay for the whole car when you only plan to use it for a few years?
Leasing a Car is More Affordable
The second advantage of leasing a car is affordability. You could be driving a new car right now for little or no down payment. Your typical monthly payments on a 36 month lease with Global Auto Lease are comparable to a 60 month conventional term finance agreement. Wouldn't you rather pay less money down and less money every month?
Tax Benefits of Leasing
The third advantage is economic sensibility. Financial advisors and experts agree that you should purchase items that appreciate in value, and rent or lease items that depreciate in value. The majority of cars begin to depreciate in value as soon as you leave the dealership, and continue to do so. Also, there are many tax deductions that favor leasing. The average cost of driving a new car is rising faster than the average income. It makes economic sense to consider leasing your new car.
| Advantages | Disadvantages |
Drive a new car every 2 to 3 years. |
No equity/ownership in the vehicle. |
Lower monthly payments. |
Early termination liability potential. |
Possible tax benefits - check with your CPA. |
Potential end-of-lease charges such as excess wear and tear or mileage. |
Little or no down payment |
|
Expensive car for less money |
|
Keep more of your cash available for other investments. |
|
Less maintenance costs - your leased car is under warranty for 80-100% of the lease |
Apart from your initial costs and monthly payments, when it comes to auto leasing, you need to know that there are certain costs associated with lease end. These charges could be for excessive mileage, damage to the car beyond "normal wear and tear".
Charges for Additional Mileage. The majority of close-end auto leases specify a set number of annual miles that you may put on the car. If the total miles at lease end is greater than this pre-specified number, you might be charged for each mile over the limit, typically 12-18 cents per mile. Know your driving habits before signing a lease to avoid this charge. You may be able to purchase additional blocks of mileage up front at a lower rate than lease end.
Excessive Wear and Tear. At lease end, you may be charged for damage to the car beyond "normal wear and tear", or beyond what is "reasonable". To avoid misunderstandings about these charges be sure to clearly define "normal" and "reasonable" wear and tear in your lease agreement and before the time of signature.
Default Penalties. Like a loan, should you fail to meet your obligations of the lease, or should you fail to make payments, the lessor may repossess the car and/or asses the costs or penalties as specified in the lease. These costs and penalties could include, forfeiture of your deposit, immediate payment of all remaining obligations, and the cost of the legal fees to reclaim the car.
Auto Leasing Options. You will have several options at the end of your lease. Depending on your circumstances you can customize your plan at lease end. You must determine some of these options at the start of your lease agreement.
Walk Away Option. If you have met all obligations of the lease agreement, such as mileage, condition and payment agreements, you may be able to turn your vehicle in and simply walk away. Usually there is a disposition fee charge with this option.
New Car Lease Option. If at lease end, your car is worth the same or less than the Estimated Residual Value, it makes sense to turn in your vehicle and sign a new lease on a new car. Even if the car is worth less than the Residual Value, you can still turn the car in, provided it is in good condition and within the predetermined amount of mileage, and sign a new lease. This is one of the advantage to leasing - you could be driving a brand new car every two to three years.
Purchase Option. If you would like to purchase your car at the end of your lease, please be sure to negotiate this option before signing. If you do not negotiate this options up front, the lessor will have no obligation to make this vehicle available to you at lease end. If you are considering a purchase option lease, the lessor must disclose to you the purchase price of the car and the formula for determining the price up front. Alternately, you might be able to sell the car at lease end and keep any equity that you might have. Consult your leasing agent.
Third Party Reassignment Option. You cannot assign your lease to a third party. You do not own the vehicle, and the lease is with you and you alone. A lease is a legal document and it is binding. Any and all responsibilities resulting from a third party reassignment are also yours and yours alone. If you think that a third party reassignment is necessary, work with you lessor so that terms may be negotiated to avoid any unnecessary financial obligations.
Right to Early Termination Option. A lease agreement is a binding contract, and like all contracts, two parties negotiate its terms. If you know that you may need to terminate the lease before lease end, be sure to include this provision in the contract before signing.
As a general rule, you will be required to honor at least 12 months of your lease agreement before using the termination option. If you choose to terminate early, there are usually extra charges and penalties. The lessor must disclose these penalties and the formula used to calculate them before the time of signature.
Before the time of signature, you are entitled by law to be informed of what you will be charged up front. These charges could include:
First Lease Payment and Deposit. Your first monthly payment may be required along with the deposit in advance. A lease, unlike a loan, requires monthly payments in advance, not in arrears.
Capitalized Cost Reduction. One option you have, to lower your monthly payments, is to make a larger down payment to reduce the car's "initial capitalized cost". The capitalized cost is the total cost of the car including fees, insurance, maintenance contracts, or options. Just like a loan, the more money you put down to start, the lower your monthly payments will be. However, this neutralizes the advantage of a lease - little or no down payment. If you desire this capital cost reduction, you may be able to trade in your current vehicle to defray the amount.
Sales Taxes, Title, and License. In most states, whether you pay in cash or take out a loan to purchase a car, you are required to pay all of the sales tax up front at the time of purchase. In a lease, most states allow you to spread the taxes out over each of the payments. The tax is applied to the payment rather than the total value of the car. You are taxed only for the amount of the car's value that you use.
As with a loan, tax, title and license fees are your responsibility. You may have the option to pay these fees up front or included and spread out over the length of the lease.
Insurance. When you enter into a lease agreement, the lessor must provide you with all of the insurance requirements and information. You have a couple options with your insurance. The lessor may offer insurance. All costs of this insurance must be made available to you prior to signing. You may also choose to use your own insurance carrier. The lessor may require higher limits of insurance - this will be detailed in the lease.
Amount Financed. The sale price of the vehicle, plus any charges for taxes, title, license fees, service contracts and insurance, less the down payment and trade-in. The amount of money subject to finance charges.
Annual Percentage Rate (APR). Disclosure of the total amount of finance charges expressed as a true percentage of the declining unpaid balance.
Balloon Contract. A loan that is amortized only down to the expected end-term value with a remaining balance to be paid in a lump sum at the end of the term.
Balloon Payment. Estimated final payment which covers the remaining expected value of the vehicle.
Capitalized Cost Reduction. A reduction of the gross capitalized cost, paid by the lessee, either in the form of cash or non-cash credit from the lessee's trade-in or rebates.
Closed-End Lease. A type of lease in which the lessee is not responsible for the value of the vehicle at the end of the lease. The lessee is liable for excess mileage and wear and tear. This is also called a guaranteed trade-in, net lease, or walk-away lease.
Down Payment. Most retail transactions involve a down payment of 10 to 15 percent of the amount to be financed. It can be less depending on your credit standing, ability to repay, and other criteria. A down payment helps lower your monthly payment as well as establish equity in your vehicle.
Early Termination. When a lease is ended before its scheduled maturity date.
Excess Mileage Charge. Leases generally contain a mileage limitation to prevent excess mileage from being driven, and therefore, excess depreciation of the vehicle. A set mileage allowance is stipulated in a lease agreement. If this limit is exceeded, the lessee is charged for each mile driven exceeding the allowable mileage, as specified in the lease (e.g., 15 cents per mile). However, if at lease inception you feel you will be driving more then is set forth in the lease, you can add the anticipated excess mileage to your lease to be paid as part of your monthly payment.
Excess Wear and Tear. Leases contain specific standards for excess wear and tear. Included are such items as missing parts, scratches, dents, mismatched/bald tires, cracked glass, ripped/torn/burned interior and inoperable mechanical parts. The lessee must either repair the excess wear and tear, or pay the lessor the estimated cost of repairs.
Gross Capitalized Cost. The agreed price of a lease vehicle including, but not limited to: dealer-added equipment, service contract fees, and insurance.
Lease. A contract between lessor and lessee for a specified time period and a specific payment. The title to the car remains in the name of lessor as owner until the lessee exercises the purchase option or turns the vehicle in at the end of lease term.
Lessee. The customer who signs a lease with the lessor and pays for use of the vehicle.
Lessor. The financial institution to which the lease is assigned. The party leasing the vehicle to the lessee, the actual owner of the vehicle and the lease (i.e., leasing company, dealer or financial institution).
Manufacturer's Suggested Retail Price (MSRP). The retail price of the vehicle as recommended by the manufacturer -- often called the sticker or list price.
Net Capitalized Cost. The difference between the gross capitalized cost and the capitalized cost reduction. Used as a basis for calculating the lease payment.
Purchase Option Price. An option in a lease which allows the lessee to purchase the vehicle at the end of the lease term for a specified price, and in some cases, during the lease term at an amount to be determined or at a specified price.
Residual Value (Lease-End Value). The lease-end value of the vehicle set at lease inception by the lessor. It's usually calculated as a percentage of the MSRP. This is used as a component of the payment calculation.
Retail Contract. Contract representing time and sale of a vehicle to customers.
Refundable Security Deposit or Reconditioning Reserve. An amount collected by the lessor at the beginning of the lease to ensure the lessee's compliance with the terms of the lease. The security deposit is generally refundable at lease end, provided there are no excess mileage, excess wear and tear charges, outstanding parking tickets, or unpaid lease payments. A few states do not allow security deposits, but do allow a reconditioning reserve. The reconditioning reserve can only be used to repair the vehicle and cannot be used for past due payments, late charges, parking tickets, etc.
Term. The duration of the retail contract/lease agreement, usually expressed in months (e.g., 24 months, 36 months).
Termination (Scheduled). The end of the lease term, as called for in the lease.
Closed-End Lease. In a lease, you make the pre-determined number of payments and then return the car at the end of the lease. With a closed-end lease, provided there is no damage to the car beyond normal wear and tear or excess mileage beyond that which was allocated, you have no responsibility for the car's value at the end of the lease. The leasing company absorbs the loss of value through depreciation in the car if it is less than the estimated residual value. The risk is "closed" to you.
For example, you lease a new car for 36 months with a residual value of $8,300. At the end of your lease, the car is only worth $7,900 - The lessor absorbs this cost with a closed-end lease. You can walk away with no further costs, IF the car is in good condition.
Open-End Lease. An open-end lease agreement is just the opposite in that you take the risk. If the estimated residual value specified at the lease onset differs from the actual market value at lease end - you absorb the difference. As per the above example, you would pay all or a portion of the difference between the $8,300 and $7,900, often called the "end-of-lease" or "end-of-term" payment. The Federal Consumer Leasing Act provides protection for open-end leases by limiting the end-of-term payment to no more than the total of three monthly payments.
However, if the car happens to be worth more than the estimated residual value at lease end, you receive all or a portion of the difference. If the auto is worth more, the equity is yours and/or may be applied to your new lease. If the market value or the amount the car can be sold for is close to the estimated residual value you can walk away owing nothing. For most people, this is not a practical risk to take. For the reason, close-end leases are more popular.
Leasing a car gives you a lot of flexibility. However, like an auto loan or a cash purchase, there are certain financial responsibilities associated with use and maintenance of the car. A lease entitles you to certain rights but also binds you to certain duties, liabilities and obligations. Most elements in a lease can be structured and adjusted to meet your needs or situation. Work with the lessor to create a lease that is right for you.
Periodic Payments. The lessor is required by law to provide the lessee (you) with the following information, both verbally and in the lease agreement: the total number of payments, the total amount of payments, the amount of each payment, the due dates of each payment, the fee schedule for late payments, and how all this is calculated. You (the lessee) are required to make all of the payments according to the lease agreement. Typically the term of the lease is between 24 and 48 months.
Insurance. The lessee is required to purchase and provide automobile insurance, typically collision and comprehensive, in accordance with the lease agreement.
Repairs and Maintenance. The lessee is responsible for maintenance and repair just as with a loan. Please be sure that your maintenance and repair responsibilities are detailed specifically to avoid confusion and costly mistakes concerning "normal wear and tear" and "reasonable maintenance". For example, small dings and scratches may be considered "normal wear and tear".
Follow the Manufacturer's Recommended Maintenance Schedule for oil changes and other items. This will help to maintain the car's original worth and allow you to take advantage the factory warranty given to you for your new car. Other necessary repairs covered under the factory warranty can be done at the dealer of your choice. If you are considering a long term lease, you may want to consider an extension to your warranty if it is available.
Vehicle Registration and Use. While a lease may have restrictions on taking the car out of state for an extended period of time without permission, leases generally do not restrict other family members from driving the car. Permission, if you should move out of state, can usually be obtained in writing through the mail.
You are required to pay any applicable renewal registration fees or property tax whether you choose to lease or own the car.
Other obligations under a lease will vary from contract to contract. Please verify your obligations at the time of signature.
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