Buying vs Leasing, the Good,
the Bad, and the Ugly
Experts agree that leasing a vehicle is almost
never the right decision for a consumer, but very often can
be the right decision for a business. Nevertheless, more
people lease motor vehicles now than ever before.
So what makes it so attractive to a lot of people and what
do you need to watch out for? We’ve seen what some
motor vehicle dealers do to consumers in leases, so we have
some free advice for you, along with our “11
Easy Steps to Your Best Leasing Deal” guide which
can save you thousands of dollars.
How Long Will You Keep the Vehicle?
The longer you plan on keeping the vehicle, the more likely
it is that you will be better off to buy it than to lease
it. If you typically keep a vehicle for 7 years then you’d
be foolish to lease it for that long. If you trade vehicles
every couple of years then leasing may be a good idea.
Not All Leases Are the Same
Each bank or financier creates their own lease form contracts.
If you see some term in one lease form that you don’t
like, then ask the dealer to use a different lease. The dealer
can use any one of probably at least half a dozen or more
lease forms from different Leasing Companies but they usually
use the form from the Leasing Company who is giving them
the best deal, which is not the same thing as giving you
the best deal.
Look the lease form over carefully. Just a few things to
watch out for: binding arbitration or jury waiver clauses,
extra charges that don’t make sense, ambiguous or high
excess mileage charges, confusing early termination penalties,
high “disposition” fees. If you see anything
you don’t like, tell the dealer you want a different
lease.
Size of Monthly Payment
The big advantage with leasing is that you will almost always
have a lower monthly payment than if you buy the vehicle.
However, at the end of the lease you do not own the vehicle
and you have to turn it in to the Leasing Company or dealer.
Essentially you are paying for vehicle depreciation plus
interest when you lease a new vehicle. The idea is that you
are paying to use the vehicle but not to own it, so your
monthly payment is less than when you are buying the same
vehicle.
At the end of the lease you also will probably have to pay
a “Disposition Fee” (anywhere from $100 to $500
that the Leasing Company charges to pay for clean up and
sale costs), and excess mileage or damage repair costs. At
the end of a motor vehicle loan, however, you own the vehicle
and you can do whatever you want with it: sell it, keep it
or give it away to a child, friend or relative. Your monthly
payment should be no more than about 1.8% to 2% of the sticker
price.
No (or Low) Down Payment Cost
With leasing, you may not have to put any money down or
very little. When buying, lenders often want you to make
a down payment, sometimes 10% or more. Some motor vehicle
dealers still try to get you to pay a big chunk of money
down on a lease and some of those advertised low payments
you see actually require it. But making a big down payment
makes no sense.
If you decide to lease, then you should pay as small a down
payment as you can get away with. You aren’t going
to end up owning the vehicle anyway, so why throw your money
away by making any down payment?
Vehicle Residual Value Effects Your Monthly Payment Amount
Residual value means how much the vehicle is likely to be
worth at the end of the lease when you turn it in. The bigger
the residual value number, the lower your monthly payment
is. The dealer does not determine this number but they will
know what it is. The Leasing Company determines the number
and each Leasing Company uses its own tables.
You should insist on knowing what the Leasing Company says
it will be in your case and if you don’t like the number,
then insist on using a different Leasing Company who will
give you a higher residual value number. If you plan to turn
in the vehicle at the end of the lease, then you are better
off trying to get the Leasing Company to agree to a higher
residual value because that will make your monthly payments
less during the less.
But watch out that the lease doesn’t require you to
guarantee the residual value or you could end of having to
pay extra money at the end of the lease in order to “walk
away” from it. In a true “walk away lease,” at
the end of the lease you owe nothing more regardless of what
the value is of the vehicle at that time.
Sales Tax
When you buy, the sales tax is on the entire price and is
owed as part of the purchase. When you lease, you only pay
taxes on each monthly payment, so it is a smaller amount.
That’s one of the reasons that the monthly payment
is smaller in a lease. Either way, though, you still end
up paying tax. And either way, it is always figured in the
monthly payment amount. But the total tax paid thru a lease
is likely to be less than with a purchase.
Length of Payments to Make
A motor vehicle loan usually lasts between four and six
years, more or less. A lease generally last two or three
years or more, depending on the size of your monthly payment.
Ownership
In a lease, you never own the motor vehicle unless you buy
it at the end of the lease. That means you can’t really
sell it without working it out with the Leasing Company and
it may cost you extra to do it. In a purchase, you own it.
Sure you may owe the bank on it, but owning it means that
you can sell the motor vehicle to anyone you want for any
price you can get. You can trade it in or drive it into the
ground.
Mileage Limitation
In a lease, you are limited to the number of miles you can
drive the motor vehicle before you have to pay an “excess
mileage” fee. The result is that you have to watch
your mileage during the lease in order to avoid paying a
penalty at the end of the lease.
In a purchase, you can forget about the mileage because
the motor vehicle is your’s to drive as much as you
want. Don’t underestimate the miles you drive when
you decide on the mileage allowance in a lease. It’s
usually much cheaper to figure those miles into the lease
in the first place.
Pro and Con Summary and Tips
Depending on what you want to do with your money, leasing
a new motor vehicle can be a smart move (but leasing a used
motor vehicle is almost never a smart move). Still, you have
to be very careful when you lease.
Shop Carefully
First, shop as though you were actually buying the vehicle.
Negotiate (argue) all of the lease terms, including the price
first (what the dealer calls “capitalized cost”).
Dealers usually don’t want to talk about the price.
Don’t make that mistake!
The price makes more difference on what your monthly payment
will be than anything else. It is also the one thing that
most people forget about when they are leasing. The rule
is simple: the higher the price, the higher your monthly
payment. There is no exception to the rule. For that reason,
negotiate the price first and aim for the lowest price you
can get.
Don’t Talk About Your Trade In Right Away
You shouldn’t tell the dealer up front that you have
a trade in vehicle. If you negotiate the price of the new
motor vehicle first, and get that number locked in, then
you can pay attention to the trade in amount more carefully
and that makes it harder for the dealer to shift your attention
from one to the other while they try to make more profit
off of both parts of your deal. Take it one step at a time
and you will save money.
Know What Your Trade In is Worth
Next, argue about your trade in allowance. If a dealer won’t
take your trade in or won’t give you a fair price,
then go somewhere else. And know what your trade in is really
worth before you ever go to the dealership! Check it out
in newspaper ads and online.
Most public libraries even subscribe to the National
Automobile Dealer Association’s “yellow book” (which
everyone calls the “blue book”) so go check
it out! You need to know what your old motor vehicle is
really worth because the odds are the dealer isn’t
going to tell you. If you have a trade in vehicle, then
you should never go to a dealership to buy or lease any
new vehicle without knowing in advance what your old vehicle
is worth.
Up Front Charges
Find out exactly what charges are owed when the lease starts
and why. Normally it will include a down payment, security
deposit, “acquisition fee”, the first monthly
payment, taxes and title fees. You may be able to negotiate
some of those numbers, or maybe even all of them.
Find Out the Leasing Company’s “Money Factor”
This is the leasing company’s way of saying the interest
rate that will be applied to the lease. To make it more confusing,
it isn’t called an interest rate at all and the numbers
aren’t comparable to normal interest rate calculations
either. To make it even tougher, the number won’t show
up on your lease at all, even though the amount being charged
is a direct cause of the size of your monthly payment.
In every case, the leasing company sets its own Money Factor
rate but the dealer will know what the rate is, so be sure
to ask. Then also ask the dealer to show you what some other
leasing company rates are. Comparison shop and get your best
rate. Remember, it’s like an interest rate so you want
to get the lowest rate you can find.
Try Not to Pay Any Money Down
Next, negotiate the amount of your down payment. Next to
the price, this is the second most important factor on what
your monthly payment will be. Most dealers will try to talk
you into making a big down payment, claiming that paying
more money down can reduce your monthly payment. Being a
millionaire can reduce your monthly payment too, but in a
lease neither one of them may have much to do with reality
for you.
The rule is simple: try to keep the money in your own pocket.
What they don’t tell you: More Down Payment means More
Dealer Profit!
Watch Out for Mileage Charges
Most leases allow you to drive 12,000 to 15,000 miles a
year, but you can increase the mileage if you ask at the
beginning of the lease. If you get a “low mileage” lease
and end up driving high miles on the vehicle before the end
of the lease, you can expect to pay between 10 and 25 cents
for each extra mile. That can add up.
Make sure you find out what the mileage charge is on the
lease for excess mileage before you sign it. Then, try to
negotiate both the mileage number and the per mile extra
charge too. Remember: if you are not going to put a lot of
miles on a vehicle, you may be better off buying a vehicle
then leasing it.
Now Read the Paperwork Carefully
Okay, so you think you’ve got it all worked out, right?
Wrong! Now you need to read the paperwork carefully. Make
sure everything that is important to you has been written
down. If it isn’t written down, you can’t enforce
it.
Lease End Charges
Carefully check what you owe at the end of the lease and
why. Some leases charge you for excess mileage, wear and
tear, or a “disposition fee”. Find out what each
one of those may be and try to negotiate each one of them.
Even if the dealer says the term is “nonnegotiable”,
do not believe it. If they want your business bad enough,
everything in life is negotiable. The amounts can change
from one lease company to another so ask about using a different
lease company.
Some lease agreements may want you to pay the difference
between the “lease end value” stated on the contract
and the actual appraised value of the vehicle at the end
of the lease. Find out how the appraisal will be done and
if you can get your own apprisal at that time. Otherwise,
you could end up owing thousands of dollars just to “walk
away” from a lease at the end of it.
Know the Length of Your Warranty
Make sure the manufacturer’s warranty covers the entire
lease term and the number of miles you are going to drive.
Otherwise, you may still be leasing the vehicle, and not
ever owning it, and paying for repairs too. It’s all
about controlling your monthly cost.
Think About the Tax Angles
And, of course, look at the tax aspects of leasing. You
may be able to write “off” some part of your
lease payments if you use the vehicle for business purposes.
But be careful, consumer protection laws and possibly your
state lemon law may not protect you for business use of the
vehicle.
Don’t Get Cheated
Most of all, be careful of the numbers. Dealers have a thousand
ways to cheat you and getting you to sign a lease is one
of the best ways they have. Defend yourself by knowing and
understanding every aspect of the deal.
When they say you have “negative equity” in
your trade in, do not believe it. Make sure you know what
your trade in vehicle is worth and what you owe on it, before
you ever go to the Dealer’s lot. Don’t just check “book
value” or ask the bank either. Look in local newspapers
and magazines for local prices for your kind of vehicle and
get “real world” value. Then, argue with the
dealer about the trade in value.
Remember, all the dealer really wants to do is make money
and “move iron”. Make sure that when they “move
the iron” they do not run over top of you with it!
We’ve seen what some dealers do to consumers in leases,
so we have some free advice for you, along with our “11
Easy Steps to Your Best Leasing Deal” guide which
can save you thousands of dollars.
If you think that you were ripped off by a motor vehicle
dealer, or if you think you ended up with a lemon, ask a
Burdge Lawyer for help. Call us toll free at 1.888.331.6422
or email us.
We know what motor vehicle dealers do and how they do it.
Whether you were ripped off or just ended up with a Lemon,
we can help. |
