OVERVIEW AND POSITIVES
The upsides of leasing are numerous. The average consumer keeps a new vehicle for about three and a half years (42 months). Since the average new auto loan is now 72 months, buyers almost never have any equity when they decide to trade in. They never own their vehicle—the lender does. This pretty much eliminates the most oft heard objection to leasing: “I don’t want to rent it—I want to own it,” since most people never truly do.

Lease payments often run 25-35% lower than the purchase payment on the same vehicle. Why should someone pay an extra $100-200 per month when they’ll never ‘own’ it anyway? Aren’t there better things they can do with that money? Or, perhaps they can get a nicer car within the same budget.

Beyond that is the simple fact that, though cars are more reliable than ever, when they do break it costs a lot more to fix them today than in the past. And if a lease is structured correctly, the lessee is always within warranty coverage, thereby limiting their out-of-pocket exposure.

Beyond payment, other upsides to leasing are that one doesn’t have to deal with the vagaries of trading in or selling at lease end. At lease termination, the lessee will be given two options: to purchase it for a set figure (set out in the contract) or to turn it back in to the lease company (either the manufacturer or someone like US Bank). If they’ve avoided inflicting excessive wear and tear, or bought insurance to offset it, they’re done.

If the lease is structured correctly, the end of term price—the residual value—will be equivalent to the car or truck’s wholesale price. Which means, if the lessee likes it, they can view the lease as a greatly extended test drive. Contrariwise, if it didn’t meet their needs anymore or if it’s been troublesome, it is now someone else’s problem.

And if the residual is market-correct, there can be a third option for the lessee to sell it on the open market and make a bit of money. The only caveat here is sales tax, which varies state to state. In general, only licensed dealers can purchase a car from a lease company without paying said tax, which averages around 7% nationwide. But many reputable dealers are willing to help a repeat customer by allowing them to run the transaction through their own offices for a modest fee, and ‘flip’ it to the new retail buyer. There also exist companies that will trade people out of their current lease into other vehicles. [Jon, look up leasetrade.com and leaseswap.com if you want to use this—both are reputable co’s with a fairly long history]

Finally, if someone has a major amount of inequity in their current vehicle, a lease can afford the opportunity to semi-painlessly absorb this while maintaining a reasonable payment and ridding one of the debt in a shorter time than through another 5-6 year loan, especially as many lease rates are subsidized and the lenders will go over the leased vehicles MSRP by up to 10% for consumers with good credit.

COMMON LEASING ISSUES
Many of the factors that have given leasing a less then stellar reputation can be addressed with some knowledge and forethought.

Almost all the loopholes that caused people considerable consternation during the ‘Wild West’ days of balloon notes and open-ended contracts in the eighties and nineties are now long gone. For simplicities sake, we will limit the scope of discussion to the most common, closed-end type of lease structure.

The federal government has overseen such leases, and the only thing not disclosed on its contract is the interest rate. Note—it is not called such in any case. It is referred to as either the ‘lease fee’ or the ‘rental fee.’ The benefit is that this is tax deductible for many people, unlike auto loan interest.

The downside is that it can be hard to figure out what the rate actually is. Manufacturers and banks offer their dealers a ‘buy rate’, which they often mark up to the lessee. More problematic is when the dealer implies to the customer that the ‘capitalized cost’ (i.e. purchase price, which is disclosed on the contract, includes all the profit.

As an example, the salesperson may tell the client that they are getting the vehicle for a few hundred over cost, and show an actual invoice to prove it. Yet, with the other hand, they have marked up the rate 1-2%, and gotten a kickback on the finance fees. This is called ‘reserve’, and can double their real dealer profit.

This is an acceptable legal practice, and most homeowners are familiar with it from mortgages. There is nothing dishonorable with it; in fact, a mark up in rate may affect the payment less than a similar profit mark up on the vehicle’s cap cost (purchase price). Aggressive buyers may ask to be walked through the math and see the rate book, however. To figure out the equivalent interest rate, multiply the money factor (which determines the lease fee) by 2400 [.00020 factor x 2400 = 4.8% interest] The other item dealers mark up is the lease acquisition fee—all leases have this, and none start below $550 anymore—but if it’s more than $750 it’s almost certainly been inflated.

A critical issue on a lease is annual mileage. Many of the frustrations people feel at lease end could be addressed if they had been cognizant of their real mileage needs (and the fact that it can change over the lease’s lifetime).

There’s nothing worse than a mileage penalty of thousands of dollars at the end of a contract. Lease companies typically offer 12,000 and 15,000 mile per year contracts; high-end cars and trucks might have lower ones. And BMW now offers the ability to adjust the mileage through much of the lease’s term if the owner’s needs change. It is usually cheaper to ‘buy’ miles at ‘up front’ (at lease inception), typically 10-12 cents/miles, than at the end, when the penalties are more usually 15-25 cents.

Leases are especially good for people who drive high annual mileages. It can be very hard to resell a three to four year old car with 60-90,000 miles on it. But since many lease companies allow contracts to be written up to 30,000 per year, the challenges of remarketing can be passed on to the lessor.

Wear and tear is the other biggest bugbear. Since many lessees never take true mental ownership, they don’t repair dings and dents or more major bodywork properly. And tires are often almost worn out at the end the typical 36-39 month term. In northern climes, lessees can purchase (and even include in the lease costs) winter tires, so they return the vehicle at termination on acceptable rubber. And lease companies are now offering insurance contracts to take care of wear and tear.

This isn’t really necessary; diligent consumers can always use the same reconditioning specialists the dealers access to take care of such things just before the vehicle is turned in (this is detailed here. [Jon—hyperlink to other articles on trade ins?] Wear and tear and turn-in issues are discussed in detail on the contract boilerplate.

The other important caveat is that a lease is structured much more like a home mortgage; during the first year it is almost impossible to trade out, and it is usually only during only the last 12-18 months—if at all—that the lessee is in a cash-neutral position. The concomitant upside is that if the leased vehicle’s market value is never equal to the residual value, the bank or manufacturer takes the loss, and the consumer paid less than the actual depreciation of that car or truck.

A final note: most all lease companies except Toyota include GAP insurance in the lease. This pays off the entire lease balance (as opposed to the car or truck’s bluebook) if it stolen or totaled. Toyota offers it as an extra fee; it is essential to the lessee’s security.

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