Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Car leasing

Dr. Don,
I just started leasing a car last month. I received a letter from the bank that I'm leasing my car from telling me that I will have to pay property taxes in addition to my monthly payments. Does that sound right?

I'm aware that you have to lease a car for a whole year. So is it possible to go ahead and finance my car after a year is up? Can the payments that I make monthly be subtracted from the total cost of the car and then finance whatever balance is left? Please help! I want to know if I got into a bad deal (which I probably have). Thanks a lot.
Melissa Motorcar

Dear Melissa,
Promise me that the next time you buy or lease a car you'll get your questions answered before you sign the contract.

One-year leases are a little unusual, while two-to-four year leases are far more common. When you lease, you're paying for the car's depreciation plus the leasing company's interest expense. One-year leases tend to be prohibitively expensive because of the high depreciation most cars experience in the first year of use. So the first step is to find out the length of your lease by reading your lease contract.

You can't subtract your lease payments from the purchase price of the car to determine what you would need to finance to buy the car out of the lease. The leasing company can provide you with a payoff balance on the lease. You can take out an auto loan to finance the payoff balance.

It's impossible to tell from the information you provided whether you got a good deal or a bad deal on your lease. At lease signing, the three biggest potentials for problems are: the price you negotiated for the car, the implied interest rate on the lease, and the residual value of the car at lease end.

Switching to an auto loan to purchase the car out of the lease won't change the purchase price or the residual value, but it will change the payments and the interest expense. Don't rush out of the lease and into a loan just because you're not sure you got a good deal on the lease. Switching to a loan isn't going to change the deal you got on your lease.

Personal property taxes are levied in some states or localities. Even if the leasing corporation is responsible for the payment of the taxes, it's normal and legal for the leasing company to pass on that expense to you.

Delaware corporations

Dr. Don:
Would you explain what the story is regarding so many banks having a mailing address in Delaware? (Most likely in Wilmington.) I know that all of these institutions do not have an office in that state.

I remember being told many years ago that the laws are different in Delaware, therefore allowing the banks to charge various fees that they would not be able to do if they were strictly based somewhere else in the United States.
Bobby Blue Hen

Dear Bobby,
As you say, the State of Delaware has marketed itself as a place for businesses to incorporate for many years. Delaware claims to have one of the most advanced and flexible corporate statutes in the nation. Its legislature works to keep the statute current along with its business laws, and the Secretary of State's office is geared toward customer service.

Delaware-incorporated businesses don't have to maintain a presence in Delaware as long as they have a registered agent in the state. The registered agent's business office must be identical with the corporation's registered office.

Since 1978 the nationally chartered banks have only been required to follow the law of the state in which its credit card operations are located. Banks moved operations to states with laws that allowed them the most freedom to charge higher rates and fees. Delaware and South Dakota are two such states.

Lucy Lazarony's Bankrate article on this topic provides additional information.

-- Posted: June 6, 2001