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.
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.
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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.
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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.
