Beware the long lease.
More Americans are stretching out the terms of their auto leases — despite the damage it does to their pocketbooks. Two out of three Americans who leased a new car in 2000 signed on for leases that were longer than three years, according to the Consumer Bankers Association’s 2001 Automobile Finance Study.
“Leasing is never going to be a cost-effective way to get from A to B,” says W. James Bragg, author of The Car Buyer’s and Leaser’s Negotiating Bible.
As with auto loans, consumer experts urge people to sign on for the shortest financing terms they can afford. Longer terms may help lower monthly payments, but you’ll end up paying a lot more in interest.
At least at the end of a five-year auto loan, the car will be yours — not so with leasing.
“With a five-year lease, you still owe a substantial amount to buy it,” says Art Spinella, vice president of CNW Marketing/Research in Bandon, Ore. “It’s bad enough to buy a car for that long, let alone lease one.”
There are other costs to consider when contemplating a longer-term lease — repairs. Most consumer experts urge people not to lease a car beyond the length of its bumper-to-bumper warranty, which typically lasts three years. Who wants to pay for repairs on a car you don’t own?
Don’t forget about maintenance costs. The longer you lease that car, the more it’s going to cost you to take care of it.
“Your out-of-pocket expenses go up dramatically the longer the lease is,” says Robert Ellis, director of LeaseWise, which is part of the Center for the Study of Services, a nonprofit consumer research group in Washington, D.C.
These charges can be costly. For example, Ford Credit reserves the right to charge as much as $2,500 for excessive wear and tear on vehicles in its Red Carpet Lease program.
“You want to be a bit wary of those things when you enter a long-term lease,” Ellis says. “Lease contracts aren’t specific on wear and tear. Obviously, as a car ages it will experience more wear and tear than, say, it would with a two-year lease.”
Many lease contracts are kind of vague when it comes to distinguishing between “normal” and “excessive” wear and tear. On its Web site, Ford lists minor dings and dents and small scratches as “acceptable damage,” and then lists dents and scratches and paint damage as “chargeable damage.”
Your best bet is to treat that leased car as a prized possession, even though it’s not really yours.
“You have to take care of the car as you would take care of your own car, maybe a little bit better,” Bragg says.
Consumer experts may want folks to think twice about long leases, but banks and leasing companies are keen for auto shoppers to sign on. The longer the leasing term, the more money the industry pockets in interest.
Plus, lots of people opt to buy a car at the end of a long lease.
“The longer the lease, the less likely the car is going to be returned to the leasing company,” says David Kretz, a manager at KPMG Consulting.
Banks, in particular, are promoting longer lease terms.
“For the most part, banks have determined that 48- and 60-month leases are their focus,” says Raj Sundaram, vice president at Automotive Lease Guide.
Banks know that lower monthly payments are important to lease shoppers and a longer term is one way to ease down monthly costs.
In a lease, a person pays the difference between what a car is worth today and what it is expected to be worth at the lease’s end, plus a monthly fee to the finance company. In leasing language, today’s value is called the “capitalized cost.” Tomorrow’s value is called the “residual value.” The lower the capitalized cost and the higher the residual value, the better deal it is for the consumer.
Lenders delivered the super-low deals of the mid-’90s by inflating residual values. Everything was fine until those leases came due a couple of years later. Few customers wanted to keep the car by paying its residual value, which was often $2,000 or $3,000 more than it was worth. Banks had to eat some big losses.
“This caused banks to take a harder look at residual pricing,” Sundaram says. “They’re being a little more selective and a little more cautious.”
Lower residual values mean higher leasing prices for consumers.
“I have customers who are leasing who are paying $100 to $150 more a month,” says Bragg, who also runs Fighting Chance, a new-car pricing service.
“Competitively bid the lease among several dealers and let them know you’re doing it,” Ellis says.
Be sure to research rebates and incentives. Don’t be afraid to negotiate the capitalized cost. Each dealership has half a dozen leasing options. Make it clear that you want the best deal available.
“Digging that information out can make a huge difference,” Ellis says.
|— Updated: Oct. 19, 2001|