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|YOUR NEXT CAR:
Should You Buy
|This Financial Guide gives you a framework for deciding whether
leasing makes sense for you. It explains the meaning of various lease
provisions and the initial, ongoing and final costs of leasing. Finally,
it gives you the information you need to negotiate the best possible
TABLE OF CONTENTS
How Leasing Works
Determining Your Costs
Questions To Ask Before You Sign
Other Factors To Consider
Will you save money leasing instead of buying? It depends on (1) how
good a deal you can strike with the dealer, (2) how many miles you put
on a car, (3) how much wear and tear you put on a car, and (4) what you
will use the car for.
To decide whether to lease or buy, you should consider the costs and
other factors involved in both leasing and buying:
- Your initial costs,
- Your ongoing costs,
- Your final costs,
- Your option rights,
- Whether you will be able to deduct any of the costs of the car for
business use, and
- Whether having an ownership interest in the car is of overriding importance.
This Guide also contains a list of questions you should ask the dealer
to ensure that you donít neglect to ask about any charges or lease terms
that might enter into your analysis.
There are two types of lease arrangements: closed-end ("walk-away")
and open-end (finance). Hereís how they work:
Closed-End Leases: The Dealer Bears The Risk Of Depreciated Value
When a closed-end lease is up, you bring the car back to the dealership
and "walk away." You must return the car with only normal wear
and tear, and with less than the mileage limit stated in your lease. Since
the dealer, and not you, is bearing the risk that the value of the car
at the end of the lease will go down, your monthly payment is higher than
with an open-end lease.
Open-End Leases: You Bear The Risk of Depreciated Value
With the open-end lease, you bear the risk that the car will have a certain
value, called the estimated residual value, at the end of the lease. The
monthly payment is lower because of this risk factor.
When you return the car at the end of the lease, the dealer will have
the car appraised. If the carís appraised value is at least equal to the
estimated residual value in the agreement, you wonít need to pay anything
at the end of the lease term. Under some contracts, you can even receive
a refund if the appraised value is higher than the residual. If the appraised
value is lower than the residual value, however, you may have to pay all
or part of the difference.
|TIP: If you disagree
with the value arrived at by the appraiser, have an independent appraisal
made (at your own expense) and then try to negotiate an agreement
with the dealer as to the residual value. Sources of independent
appraisals include other dealerships or (if available) a vehicle appraisal
Your total lease costs will consist of
- Your initial costs,
- Your continuing costs.
- Your final costs.
- Your option costs (if any).
The federal Consumer Leasing Act (CLA) limits how much the dealer can
collect at the end of the lease period. The CLA says dealers cannot collect
more than three times the average monthly payment. However, the dealer
can collect a higher amount where:
- The vehicle has unreasonable wear and tear or miles greater than specified
in the lease,
- You agreed to pay a greater amount than specified in the original
- The leaser wins a lawsuit asking for a greater amount.
The dealer also has the option of selling the car at the end of the lease
term. If the car is sold for less than the residual value stated in your
leasing contract, you could be obligated to pay as much as three monthly
payments to make up the difference.
dealers will generally not risk the goodwill of their customers and
sell leased cars for less than the residual value just to move the
car quickly, you may want to negotiate to include the right to approve
the final sales price of the leased vehicle as part of your lease
Your Initial Lease Costs
In deciding whether to lease or buy, find out what your total initial
costs will be. This is part of the total dollar amount you will arrive
at to compare with the cost of buying.
Initial costs are the down payment you must come up with when you lease
a car. They include the security deposit, the first and last lease payments,
the capitalized cost reductions, the sales taxes, title fees, license
fees, and insurance. With a lease, the initial costs usually total less
than the down payment needed to buy a car. Further, all initial costs
are subject to negotiation during your bargaining with the dealer.
The federal Consumer Leasing Act requires the lessor to disclose all
up-front, continuing and final costs in a standard, easy-to-read format.
Security deposit. The lessor is allowed to keep the security
deposit if you owe money at the end of your lease or if you missed a monthly
payment. The security deposit can also be used by the dealer to cover
damage to the car or mileage in excess of the limit specified in the lease.
If you do not owe any money on the lease at the end of the term, your
security deposit is returned to you.
First and last lease payments. The first and last monthsí
payments are usually required to be put down at the beginning of the lease
agreement. Under some agreements, the last payment might be waived if
you have a good credit rating.
Capitalized cost reduction. This is similar to a down payment.
The dealer may ask you to put a certain amount of money down before leasing.
The amount of the capitalized cost reduction varies with the business
custom prevalent in the geographic area and the credit rating of the customer.
The greater the down payment, the smaller the monthly payment under the
lease. However, most people who want to lease instead of buy donít want
to put down a large down payment, and the lack of a down payment is one
of the major advantages of leasing.
|TIP: Trading in
your old car can reduce your down payment and/or your monthly payments.
Sales tax, title fees, and license fees. The CLA requires the
dealer to disclose sales tax, title and license fees in writing. It also
requires the dealer to tell you how much coverage and what type of insurance
is required. Some states apply a "use" tax, which is similar
to a sales tax, but is added to each monthly payment.
Your Continuing Lease Costs
The next amount you must determine for the purposes of your lease-versus-buy
comparison is the continuing costs of leasing. These include monthly payments,
and repairs and maintenance.
Similar to a loan, the monthly lease payment is dependent on the term
of the lease, the initial "purchase price" of the vehicle and
the implicit interest rate. Unlike a loan, another important factor is
the "lease-end" or "residual" value. This is the expected
value at the end of the lease term.
In a lease you are effectively paying for the difference between the initial
purchase price and the residual value. You should negotiate the best possible
(lowest) purchase price. This will lower your cost of leasing. If this
is a closed-end lease and you do not intend to purchase the car at the
end of the lease term, you should also try to negotiate a higher residual
|Example. If you walk into a dealership
and ask to lease a car, they will often try to base the lease on the
Manufacturerís Suggested Retail Price (MSRP). You would never pay
this sticker price to purchase a car for cash, so you should not do
so in a lease situation. You should first negotiate the lowest possible
price on the vehicle and then negotiate the lease terms.
For example, assume a car has an MSRP of $36,955 (and the lease provides
for a term of 36 months, an implicit interest rate of 6.67% and a
residual value of $25,895). Based upon this MSRP, the monthly lease
payment would be $481.50, excluding sales/use tax, licenses, etc.
The invoice (dealer) cost on the same vehicle is $32,469 (see InfoSources
at the end of this Guide to find out how to get this information.)
If you negotiated a price between MSRP and invoice, say $34,750, the
lease payment would be reduced to $416.00.
|TIP: Professional guidance may in some
cases be helpful in comparing the continuing costs of buying .
|Planning Aid: For additional information
on buying and leasing a car, including insider tips and new car information,
please see Car Prices
Purchasing the same car at the negotiated price under the same
terms with no down payment would result in monthly payments of $1067.74.
The CLA requires dealers to disclose the total number of payments, the
amount of each payment, the total amount of all payments, and the due
date or schedule of payments. There is usually a penalty for late payment,
which the lessor must disclose to you.
|TIP: The expenses of operating your vehicle should
also be taken into account. As part of your negotiations, try to make
the repair and maintenance one of the terms of your lease.
- In a "maintenance lease," the dealer assumes the maintenance
expenses. Conversely, in a "non-maintenance lease," the customer
assumes these expenses. If the dealer is to provide repair and maintenance,
you will have to bring the car to the dealership in accordance with
the manufacturerís suggested schedule in order to keep the warranty
coverage. (Even if you have to pay for repair and scheduled maintenance,
you usually have to observe the manufacturerís scheduled maintenance
in order not to jeopardize warranty coverage.)
- The lease may contain a "budget maintenance" provision,
authorizing the dealer to collect a set amount from you each month for
maintenance. If maintenance expenses are incurred, the dealer deducts
them from your maintenance account. At the end of the lease, youíll
have to make up the difference or youíll get a refund if youíve deposited
more than was used. If you would like extended warranty coverage,
some dealers offer it at extra cost.
|TIP: Lease agreements
often require that a minimum level of insurance be maintained on the
vehicle. You should consider whether your continuing insurance costs
are higher on a lease than on an outright purchase. Also watch out
for lease provisions where the lessor will purchase the insurance
and bill you for the amount. This can be more costly than if you arrange
the insurance yourself.
Your Final Costs
- Final costs include.
- excess mileage charges.
- default charges.
- excessive wear and tear charges.
- disposition charges.
Excess mileage charges. Mileage limitations usually occur with
a closed-end lease. If you have gone over the allowable mileage at the
end of your lease, you will have to pay a fee. With an open-end lease,
although there is no penalty, if you exceed the mileage limit the appraisal
value at the end of the lease term will usually be lower.
carefully whether the mileage allowance is enough. Make some calculations
of the miles you have driven per week, month, and year to find out
whether the mileage allowance is sufficient. Be aware that the low-mileage
lease deals currently popular in certain areas offer mileage limits
that are insufficient for many people. If you think you need more
than the allowable mileage, negotiate a larger mileage allowance in
you stay under the mileage limit, you donít get a refund.
Default charges. These cover any payments or security
deposits that the dealer does not receive from you and legal fees and
costs the dealer incurs to repossess the car.
Excessive wear and tear charges. Youíll have to pay charges
for excessive wear and tear when you return the car at the end of the
lease, unless the contract reads otherwise. The dealer must tell you in
writing the specific definition of excessive wear and tear. Generally,
it means anything beyond normal mechanical or physical usage.
Disposition charges. These are the costs of cleaning the car,
giving it a tune-up, and doing final maintenance. If the agreement does
not state otherwise, the dealer may pass these costs on to you.
Your option rights include the right to (1) purchase, (2) extend or renew,
and (3) early termination.
Purchase Option. Your lease may include the option to purchase
the car at the end of the lease term. This option is usually found in
open-end rather than closed-end leases. Under the CLA, the dealer must
tell you the estimated residual value of the car and the formula that
will be used to determine your purchase price at the end of the lease.
|TIP: If you think
you might want to buy the car, be sure the purchase option is in your
lease before you sign it; otherwise youíll have to renegotiate later,
at which time you may have less bargaining power.
Renewal Option. You should negotiate the right to extend or
renew as part of your lease. Sometimes the lessor will reduce your cost
if he knows you might want an extension of the contract.
Early Termination Option. If you terminate your lease after,
say, 36 months on a 48-month lease, you will have to pay an extra charge,
based on the difference between the residual value of the car at that
time and the estimated residual value at the end of the lease term (stated
in the contract). The difference between these two may be great. In most
lease agreements you must keep the car at least 12 months.
The CLA requires that the dealer tell you before you sign the contract
whether you can terminate early, and the cost of early termination.
|TIP: Look for
a premature termination clause, which provides for termination prior
to the end of the lease term.
Here is a list of questions you may want to ask the dealer before
you enter into a car lease (youíll know some of the answers):
- What kinds of leases are available and what are the differences? (We
explained the two main types of leases earlier, but dealers may have
- What will my initial costs of leasing be?
- What will my continuing costs of leasing be?
- Will a trade-in decrease my initial cost or continuing costs?
- What happens if I exceed the specific mileage in my lease?
- How will my mileage allowance be enforced if I take an early termination
or a purchase option?
- Can I sublease if I fall behind in my payments or want to stop leasing?
- What happens if I want to terminate my lease before the agreement
- What are my options at the end of my lease?
- What costs and charges can I expect to pay at the end of the lease?
There are a number of other factors that come into play in the lease-vs.-buy
- When you buy a car, every monthly payment increases your equity. Youíll
end up with a car (of depreciated value) you can either sell or keep.
In leasing you get no equity; the monthly payment is more like paying
rent. You donít own the car at the end of the lease, though you may
have the option to buy if that is included in your lease agreement.
|TIP: With leasing,
you can invest the money you would have used for the down payment.
If you use the car for business, whether you lease or buy, you can
deduct some or all of the cost of the car. However, there are limitations.
If your buy or lease an auto with a value of more than about $16,000
the amount of your annual tax deduction will be limited.
2. Leasing contracts usually donít have
to be listed on a loan application; leaving your credit free for other
3. Leasing provides convenience and increased
cash flow, since the initial costs can be lower.
month by month suggestions and ideas to improve your financial
Advice provides inside secrets, tips and facts about auto buying
and leasing, invoice price, rebates and trade-in tips as well as how
to save money on financing, insurance, warranties and much more.
Buying and Leasing a Car includes insider tips and new car information.
and Selling a Car provides new and used car pricing, reviews, buying
& selling information.
Purchasing Information provided by AutoByTel.com.
provides comprehensive information on entire leasing process.
Your Car provides new and used vehicle financing with online approvals.
Quotes enables you to receive quotes from several companies by completing
one quote form.
Car Ratings, detailed buying advice, and a comparison of buying
vs. leasing is offered by Consumer Reports Online.
News Network provides valuable information on the insurance industry
and helps you choose a company that best fits your personal needs.
Blue Book provides a variety of information about automobiles.
CarPoint offers prices and previews, new car reviews, Kelly
blue book values and virtual auto shows.
Your Car enables you, the consumer, to access financing services
at your convenience 24 hours a day, seven days a week via the Internet.
Services include refinancing and lowering your existing car payments,
as well as offering new and used purchase financing and lease buyouts.
Books and Other Publications
- The Complete Car Cost Guide, IntelliChoice, 800-227-2665.
- Edmundís New Car Prices, Edmund Publications Corporation.
- N.A.D.A Official Used Car Guide (available at libraries).
Lists prices, wholesale and retail, for domestic and imported used cars.
Government and Non-Profit Agencies
- Better Business Bureau
- The National Vehicle Leasing Association
PO Box 34579
Los Angeles, CA. 90034-0579
Tel. (310) 838-3170
- The Federal Trade Commission
Credit Practices Division
Washington, DC 20580