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Car Leasing Strategy

Written by Robert G. Jackson    Friday, 13 February 2009

A lease deal could be as good as a purchase deal but it often isn't. Besides using confusing language, some salespeople use unethical sales tactics like convincing people to pay what amounts to more than the full sticker price for their leased car. Some of the tricks reported to consumer protection agencies are downright illegal like cheating people out of the credit for the car they trade in, or even leading them to believe they're negotiating a loan when they're actually signing a lease deal. New disclosure language mandated by the government took effect in late 1997. It's a step in the right direction, but it still won't force leasing companies to disclose all the information you need to comparison shop. How leasing works. When you sign a lease, you make the deal with a car dealer, who acts as a representative of a leasing company. That company may be the finance arm of an automaker (Chrysler Credit, Ford Credit, GMAC), or it may be a bank or other financial institution. After you sign the lease, the dealer sells the car to the leasing company for the price you negotiated. Your monthly payments which cover depreciation, interest charges, and any state taxes go to the leasing company, not to the dealer. The lease spells out a term, typically two or three years, and the amount of each monthly payment. Usually, it also quotes a "residual value" nominally, an estimate of what the car will be worth at the end of the lease term. Your monthly payments are calculated roughly on the basis of the difference between the car's initial price and its residual value. With a standard "closed end" lease, you can walk away from the car at the end of the lease or, if the lease includes a buying option, you can buy the car. Don't sign an "open end" lease, which requires you to make up any shortfall between the residual value of the car, as projected in the lease, and the actual value at the end of the lease. Automakers that want to boost sales can subsidize leases ("subvent," in leasing parlance) by having their captive finance companies offer a high residual value. That means lower monthly payments, which can be a good deal for you if you walk away from the car at the end of the lease. Be prepared to live with the terms of the contract. For example, if you exceed the mileage limit, you may have to pay as much as 25 cents per mile for the excess. So estimate your mileage needs carefully. A 12,000 mile limit is typical, but you can negotiate a higher limit if necessary. Resolve to take good care of your car to avoid steep "excess wear and tear" charges. And be prepared to stick it out for the full term of the lease, since terminating prematurely can set you back thousands of dollars. Shopping for a lease. It's best to keep an open mind, approaching a leasing deal as if you're buying the car. Follow the buying advice we give on page 258. Ask several dealers for their best purchase price, and bring up leasing only after you have the lowest price. Then you can compare and decide which is best for you. Also, check the newspapers for ads offering factory subsidized leases. Even if the car models offered aren't ones you want, the ads will give you an idea of the deals that are available. Throughout the negotiations, make sure the capitalized cost the price of the car is no higher than the purchase price you negotiated. Ask what "money factor" is used to work out the monthly payments. Multiplying the money factor by 2400 gives the approximate interest rate. Make sure GAP (guaranteed auto protection) insurance is included at no extra cost. If the car is stolen or destroyed, GAP insurance will cover the difference between the book value of the car and what you owe on the lease. Before you sign the contract, ask to take it home for careful study or expert advice. Be sure you understand everything. The vehicle identification number in the contract should match that of the car you want. And see that the automaker's warranty covers the full term of the lease. If important information is missing, have it added. Terms like "excess wear and tear" should be defined clearly. Used car leasing. Although it's growing even faster than new car leasing, used car leasing still accounts for a very small proportion of used car transactions. A used car lease offers the major attraction of a new car lease: low monthly payments, But it also combines the disadvantages of leasing with the disadvantages of buying a used car. You may have scanty information about what you're really paying and how it's derived. And you're taking a chance on the car's reliability. You also give up the thrill of driving a new car, one of leasing's major selling points. Before you consider leasing a used car, calculate how much it would cost you to buy the car instead.

Last Updated ( Friday, 13 February 2009 )