Leasing Cars Truthfully Explained
Leasing Cars can be a very rewarding experience if you have had your eyes wide open for the entire process. You can possibly drive that Mercedes S-class for four years instead of a Honda Pilot.
If you look at the monthly payments they're not really that far apart. Maybe even only a $100.00 or so. Won't your friends be jealous and your neighbours will think you are doing so well. Yes, you are probably right. Remember though, leasing cars means you either have to hand it back in four years (at the end of term) or buy it out( pay the remaining balance at the end of the term).
Leasing cars first came onto the scene because banks would not extend the length of the terms available for financing. In the 1950's a car loan was for 24 months on average and with payments of a couple hundred dollars. The price of cars kept going up as the years progressed and people still only wanted to pay a couple hundred bucks a month. Therefore the financing terms for the dealers and automakers needed to be longer to accomodate the customers. Once the lenders hit 60 months they refused to extend terms any further (until recently). Voila,
was invented and unfortunately, so were the lease scams.
There are over 19 000 000 leased cars on North American roads right now and the number keeps increasing. Obviously many people must be happy leasing cars or this wouldn't be the case. Unfortunately along with all of the positives with this type of financing there can also be many negatives.
What is a Lease exactly?
Some people say you are renting the car. Actually, what you are doing is paying for the portion of the vehicle you are using, similar to renting but much cheaper. That is of course unless you try to return the vehicle early.
To make things easy, here is a very simplified example: when you buy you take the selling price of $10000.00 add your taxes and divide it by your term, adding your interest incurred by the loan on the diminishing amount. Your first payment is $250.00, $137.00 of that amount goes to pay off the interest and $113.00 goes to lower your principle (the $10000.00 plus taxes). The next month is the same payment of $250.00. The difference is $126.00 goes to interest and $124.00 goes to the principle.
With a lease you take the $10000.00 less the amount it will be worth at the end of the lease and divide it by the lease term. $10000.00 less $3500.00 (residual value) leaves $6500.00. Your payments are $135.00 (plus taxes). You only pay taxes on the amount of the vehicle you use or on each monthly payment. That is what a lease looks like and the difference from a car loan, which is why you can drive an S-class in a lease for a similar payment as a buy over the same term of a lower priced vehicle.
The end result of a lease or a buy is that you are going to pay for a
profit to the dealer
regardless. You will normally pay a larger profit though if you lease.
Most dealers will tell you it is not about the payment you are making but about the payment you are not making. You can take the $100's you have saved each month and do something else with the money. Great idea, if any of us would actually do thatwhen leasing cars. Although, the fact of today's auto industry is that many manufacturers are not even interested in leasing, so it's not really a bargain at all. The enticment of leasing for most consumers is either the lower payment for the same vehicle or a similar payment for much more vehicle. If the payments are not doing this for you, why lease at all.
There are many pitfalls to leasing that people fall into and there are also some advantages to it. Dealers loved it for the profit center and for the influx of good used vehicles always becoming available at great prices for their lots. A dealership as we know is only interested in one thing, How Much Profit Will Be Made. Bigger profits are made from easier to handle and confused customers.
Even with all of the disclosure laws being enforced now, it doesn't protect you from the confusion. Your confusion regarding the clauses and fine print can cost massive penalities down the road, especially on vehicles who's values diminish quickly.
All leases contain penalities for excess wear and tear. Who determines excess wear and tear? The same people who make an extra profit from excess wear and tear and who leased you the car in the first place. Tires having less then 50% tread wear left, could cost you an extra $800.00-$2500.00. The dealer could then potentially put on $500.00 worth of tires. A profit of $300-$2000 was just made. Most reputable dealers will not "hose" you this badly but you should still be aware of it.
Always read the "fine print" thoroughly. If you are responsible for the vehicle until it is returned to the lessor, which may not be the dealership, what happens while it is sitting on their property and gets damaged? Would you be upset to have an unexpected bill for $3500.00 worth of body damage sent to your house. I know I would.
Lessor: The company that is the leagal owner of the vehicle (Honda Financial Services)
Lessee: The individual or company leasing the cars (You)
Capital Cost: The selling price, including all taxes, title(ownership), acquistion fees, license, extras (warranties insurance)
Acquistion Fee: Cost of arranging financing. Many lessors do not charge this fee.
Cost of Borrowing: How much it will cost you to borrow the money for the lease
Capital Reduction: Down payment you have paid
Residual Value: The value of the vehicle at the end of the lease
Early Termination: Ending your car leasing agreement before the specified date
Excess Wear: Anything above their definition of normal wear and tear. Even simple stone chips could be classified of excessive.
Excess Mileage: More mileage then the agreed upon amount
Purchase Option Fee: Some companies will charge this as a penalty but really all it is .....Profit
Security Deposit: A fee charged as security for the lessor. Under most conditions it should be refunded at the end of term
GAP Insurance: Insurance which allows you to not owe extra money if the vehicle is wrecked or damaged
Closed Lease: You are not responsible for the value of the car at the end of the lease if specified criteria are met
Open Lease: You could be responsible for the entire value of the car at the end of term
How do I know if leasing is for me?
There are many advantages to leasing cars. Some are the tax breaks if you use the vehicle for work. Security of not owning the vehicle in case of an accident and subsequent lawsuit, the owner/lessor gets sued. You enjoy driving a new car more frequently (every 2-4 years). If the vehicle gets damaged by an accident and you are in a closed lease you aren't affected by the depreciation. There are multiple reasons why leasing can be an advantage, but remember with any advantage there is a disadvantage, cost.
Some quetions you should answer before deciding to start leasing cars
Are you comfortable with making car payments?
You won't own the vehicle unless you buy it out at the end of term, which costs you substantially more then just buying it outright, and you will continue to have payments.
Are you sure of the mileage you will need to drive for the next few years?
Leasing cars will have mileage restrictions which can have severe costs involved if they are exceeded. $0.10- $0.23 per.
Is your job and finances stable?
Trying to end a lease early could have exstensive costs involved.
For ourselves, we think leasing cars can be a great experience, if you are prepared and you do it the smart way. Follow the advice that pertains to your situation and
ask the appropriate questions.
If you take your time while thinking about leasing cars and are armed with all the information you can gather you will be sure to make the decision that is right for you.