Car leasing 101
Daniel Jimenez • Bankrate.com

Ten years ago, it seemed the only people who leased automobiles were corporations who secured the cars for business. That was before new car sticker prices rocketed to over $20,000. Nowadays, more drivers are turning to leases each year as an alternative to ownership.

What makes leasing so attractive? Drivers have been lured into dealerships by low monthly payments and the chance to trade in for a new car every few years. Those are definitely important factors to consider in your decision making. But before you leap into the leasing fray, realize that you need to proceed with caution because things are not always as they seem in the world of auto sales.

Leasing basics

Let's quickly go through the basics of auto leasing. The process begins when you pick out a car at a dealer's showroom. Don't let the salespeople know that you plan to lease until you've agreed on a price first. If they suspect that you are a lease prospect, sellers are likely to focus on the monthly payments rather than the list price of the vehicle. This could result in your paying the full list price or being locked into far too lengthy a lease.

Instead, strike a bargain on the price as if you were going to buy. Once a price has been set, tell them you want a lease that will fit that price. For example, you might haggle a $25,000 car down to $22,500. When the lease is up, you can give back the car or buy it at a predetermined price, say $15,000. Your monthly payments are based on the $7,500 difference between the car's up front cost and it's end-of-lease price, plus interest and incidental expenses. So you pay $2,500 per year on a typical three year deal.

The key to judging a lease is knowing the true price of the car that you're interested in. The term is referred to as the "capitalized cost," which is just a fancy name for the amount of money that the leasing company paid for the car. The cap cost should be disclosed to you at the start of the negotiations.

To minimize your costs in case you have to break your lease early, you want a low monthly payment and a low cap cost. If you intend to buy the car at the end of the lease, add up all the monthly payments plus the end-of-lease purchase price. The car with the lower total cost is the better deal. For additional information on lease contracts and factory lease promotions, check out LeaseSource.

Misconceptions

Now that you understand how the leasing process works, you'll want to protect yourself from any unscrupulous salesmen by learning the truth behind some common leasing misconceptions. Below, we debunk some false ideas many people have about leasing.

1) Leasing is cheaper than buying.Well, it can be, but not always. One of the major attractions of leasing is the lower monthly payment. The reason the payments are less expensive is because you're only paying for the amount by which the car's value depreciates during the time that you use it. If you were to actually purchase the car at the end of your lease, it can run you significantly higher over the price of the vehicle had you bought it outright.

The lower payments are only an advantage if you actually take the difference and use it toward a profitable investment and build up equity. Of course, it's much easier to just spend the money instead of investing it.

If you invest the difference, leasing is worth it, says Jon Quade, an automotive industry consultant for AutoMotivators in Hoffman Estates, Illi."With the average 60-month loan contract it takes 38 to 40 months for the buyer to reach an equity position. With a lease, you're not concerned about equity," he says.

For example, if you took out a five-year auto loan, you'd still be in a negative equity position even after making payments for three years. Leases are not equity builders because the consumer is basically just renting the car.

2) Newly passed disclosure laws give you full protection. You'd really like that to be true wouldn't you? Too bad it's not.

The main complaint about leasing has concerned the prevalence of hidden costs. Those costs often show up in the form of down payments, acquisition fees, disposition fees, excess mileage, wear and tear charges, and gap insurance. As a result of the complaints, federal regulators passed legislation early this year that requires dealers and lessors to provide a disclosure form with key lease details.

The truth is that the new laws still do not require dealers to tell you the lease's interest rate. Also, the form doesn't have to be provided until the final stages of the contract. Quade recommends working with established dealers to avoid any sales sleight of hand. Leasing "is a good thing for most people if you stick with a major leasing company. It's not worth their reputation to sneak fees by people. It's worth your money to go with a respected chain."

3) Dealers can't charge you for additional damages after you've already turned in your car. Don't bet on it. Let's say John Doe is returning the car he leased back to the dealership. The vehicle inspector notices a dent and tells him that it will cost about $200 to fix. A month later, the dealer sends John a long list of damages totaling $1,000. Can they do that? You'd better believe it.

How is John going to dispute the claim if he no longer has the car? Unfortunately, consumers are often left at the mercy of the leasing company because there are neither industry standards nor government regulations requiring binding damage estimates at the time the car is returned, says Terry O'Loughlin, consumer affairs investigator for the Florida Attorney General's Office in Fort Lauderdale, Fla. "That is a problem that is growing. We've gotten more than 20 consumer calls about that so far this year," says O'Loughlin.

Here's what you need to do to protect yourself. First, read the end of term conditions on the contract very carefully prior to returning the car. Don't take the dealer's word for it if he tells you that nothing needs to be done. Call the leasing company directly and have them go over the contract specifics if necessary.

Second, pay a third party to inspect the car. Your leasing company can put you in touch with an independent damage appraiser. They'll tell you what repairs need to be done. Crawford & Company is one of the better known companies that handles such appraisals. Hiring a mechanic yourself to make the repairs will probably cost much less than what the leasing company would charge you to fix it.

Third, always ask for a damage estimate in writing. You may even want to take pictures or a videotape of the vehicle before returning it.

4) Wealthy people usually choose leasing over buying.This misconception may be generated by people with so-so or bad credit who find it very difficult to get a lease. A good credit history, not wealth, is required to lease a car since leasing companies can take a big loss if you don't make your payments and the car has to be repossessed. Since some leases may not require a down payment, and lease payments are so much lower than with a purchase, the lessor wants to be darn sure that you won't miss any payments.

While it is true that a greater percentage of luxury cars are leased over other cars, leases make up less than 40 percent of total dealer transactions, according to the National Automobile Dealers Association. In their book The Millionaire Next Door, authors Thomas J. Stanley and William Danko write that more than 80 percent of millionaires purchase their vehicles. This would suggest that if buying is good enough for a millionaire it should be good enough for you.

5) Leasing has tax advantages over buying. Uh-uh. Some motorists think that leasing is what allows them to deduct mileage as a business expense. The reality is that whether you lease or purchase a vehicle has no bearing on what is considered legitimate business usage. The only difference is that tax deductions are somewhat easier to figure out in a lease, says Gary C. Worthington, lease and fleet manager for Harbor Chevrolet/GEO in Long Beach, Calif.

"A purchase, especially if the cost is over $16,600, becomes more complicated to deduct with current tax laws and usually requires accountant assistance to do it properly. Leasing really offers a simpler way to do your taxes. Mileage limits are sometimes easier to work with in a lease, and in some cases, may be a bargain," says Worthington.

Posted: April 28, 1998