Friday, March 08, 2013

The Good and Bad About Leasing a Vehicle

Low interest rates and a shortage of used vehicles have caused an increase in leases which now account for 21% of all vehicle transactions.  According to R.L. Polk & Co., leasing is becoming steadily popular among retirees and generation Z, those ages 18-24.

I leased a vehicle twice and won’t do it again though leasing may be a good option for you. When shopping for a vehicle to lease look for sample lease agreements or contracts so you can be aware of the standard fees on a lease agreement such as: acquisition fee, capitalized cost, early termination, excessive wear and use, capitalized cost reduction, rent charge and disposition fee. Lease agreements do not show you the interest rate you are paying.  However, by law the lease agreement must show the total finance charge also known as the rent charge.

When looking for a vehicle to lease consider the features of the vehicle, the option to trade in your current vehicle or purchase the vehicle at the end of the lease term, obtain lease quotes, research and read articles on leasing versus buying a vehicle, 24/7 customer service, online bill payment, reputation of company and consumer report ratings.

Dealers can lower the monthly payment by reducing the number of annual miles allowed.  “Vehicles with higher miles are worth less and require more reconditioning when they’re turned back in at the end of a lease,” says spokesperson Pamela Morris. “Each mile can cost you an extra fifteen to thirty cents a mile, which means driving the vehicle for just an additional 3,000 miles would cost between $450-$900 depending on the rate specified within the contract,” says Morris. When purchasing a lease be sure to know the number of miles you drive per year to prevent paying a penalty fee.

Possessing good credit allows a buyer to get the lowest interest rate on a vehicle lease.  Buyers with bad credit seek leases as an option because they are not eligible for traditional vehicle loans but may not qualify for a lease because of their credit score.  Here are some questions to ask yourself before leasing a vehicle:

  1. What are your current financial needs – you need extra cash each month, you can’t afford to make a down payment, etc.?
  2. How will I be using the vehicle – for personal only, business only or both?
  3. Can I use the vehicle as a tax write-off?
  4. Where will I be driving the vehicle – on rough terrain, rural or urban area, stop-and-go traffic, highways only, etc.?
  5. What is the gas mileage?
  6. Are there cheaper options such as vehicle sharing, carpool, public transportation, a used vehicle, etc?
  7. How much do you drive in a year?
  8. Will you remain in the same area for the term of the lease or be required to move?
  9. Is the company reputable?
  10. Do you haul pets, children, equipment, and heavy objects on a frequent basis which could affect the vehicle’s resale value?
Use this calculator from Smart Money to determine if leasing an auto is the best option for you
Here are the pros of purchasing a lease vehicle.
  1. Freedom – you have the freedom to lease a new vehicle every 3-5 years without the hassle of a traditional vehicle loan.
  2. Lower down payments – you may be offered lower down payment requirements.
  3. Easy return – when the lease expires give the keys to the dealer and you are free and clear to buy a new vehicle, buy the lease or lease another vehicle.
  4. Payment – you get lower monthly payments since you are not paying the full value of the vehicle.
  5. Cash – frees up extra money by paying a lower monthly payment versus a traditional vehicle payment
  6. Value – you don’t have to worry about the vehicle depreciating in value because you have the option of purchasing a new one at the expiration of the lease term.
  7. Credit – may not get approved if you have bad credit or if approved you will pay a higher interest rate or larger down payment.
  8. Condition – you can get any brand new vehicle with all the features that you want.
  9. Purchase – the lease price is cheaper than purchasing a new vehicle
Here are the cons of purchasing a lease vehicle.

  1. Payment – if you fail to make a payment on time you will be charged a fee.
  2. Inspection – returning the vehicle at the end of the lease requires a vehicle inspection by the dealer.
  3. Lost money - your payments don’t go towards anything so you are just throwing money away which could be used for something else.
  4. Upfront fees - you pay sales tax only on your monthly payments in most states, you pay a financial rate (money factor) similar to the interest on a loan, you may have to pay a security deposit and you may pay the first monthly payment when you sign the contract in addition to other fees.
  5. Hidden fees – there may be hidden fees on the lease agreement.  You may have to pay a disposition fee when you return the vehicle and a restock fee if you decide to purchase the vehicle. 
  6. Credit - may require a higher credit score.
  7. Insurance - requires purchasing collision and comprehensive insurance including bodily injury and property damage liability. If your vehicle get stolen or is totaled your insurance will only reimburse you for the current market value which may not be enough to pay the remaining amount owed on the lease.
  8. Mileage - you have a set limit of miles you can drive each year, if you go over that you are charged a fee. You can select an unlimited miles option but this will increase your monthly payment.
  9. Condition - the vehicle has to remain in the same condition it was when you leased it – no accidents, if not you pay a penalty fee when you return the vehicle.
  10. Cancelation - if you decide to cancel before the term expires or if your vehicle is damaged or stolen it is considered a form of early termination which means paying a penalty fee.
  11. Purchase - you have the option to give the vehicle back after the lease term expires or buy the vehicle which is usually for a higher price.

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