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Fall 1999 

Introduction to Leasing
Buying vs Leasing
Taxable Benefits
Real Life Example
Common Lease Terms

Buying vs Leasing Your Next Automobile

LET US LOOK BACK AT THE QUIZ and explain the rationale behind each question and answer:

  1. Leasing is a contract that commits you to a vehicle for the entirety of its term. Its major attraction is its relatively low monthly payment that may tempt you to lease amore lavish car than you would have ever dreamed of purchasing. However, you just cannot dump a leased car if it suddenly no longer fits into your lifestyle. The cost of early termination can be exorbitant...so as a general rule, don’t jump into leasing until your financial position is secure and stable.
  1. Everyone loves driving a new car, however the price of that joy is car payments that can last forever. When you lease, you do not own the car and when its term is up, you’ll be presented with two options. The first is to turn in the car and enter into another lease on a new vehicle. This will assure you of a new car every three years or so. The second option is to purchase the car at the end of the lease. Before considering this option, look at the lease contract you signed three years earlier. Some lease agreements are "closed end" leases that spell out the car’s "residual value" or its worth at the end of the lease. This is the amount you will have to pay to purchase the vehicle at this time. However, it may sometimes be open to negotiation with the lessor since your buying the unit at this time will save him such expenses as servicing the car and bringing it to an auction for resale. Other leases are "open end" leases. Under these contracts, the residual value is determined at the end of the lease thus inviting an inflated price should you wish to purchase the car. To allow the most flexibility at the end of the lease, enter into a closed end lease when you sign the contract. If ownership is your goal, the faster you pay off the vehicle, the less it will cost. Shop around at various financial institutions to find their lowest lending rates and compare them with what the dealer has to offer. Take the lowest simple interest rate you can find for the shortest term you can afford.

  2. Leases restrict mileage and provide for penalties if you drive more kilometres by the end of the lease than what was stipulated in the contract. Typical leases allow for an annual total of 20,000 to :25,000 kilometres which is a range well suited to the average driver. Additional kilometres can usually be "purchased" at the beginning of the lease for less money than what the lessor will charge you at the end. Some lessors even allow you a refund of any unused, purchased mileage making this option quite attractive if you are uncertain just how much driving you are likely to do over the period of the lease. As the end of the lease approaches, you may find that the mileage that you have put on the car is greater than the contract has allowed. One option that may be available, is to roll your present lease into a new one, thus terminating your original agreement. The lessor may agree to waive the remaining payments on your initial contract as well as the termination fee that accompanies it, in return for your continued business on another lease. A second option is to negotiate to purchase the vehicle now, before the end of the current lease agreement.

  3. Maintenance during the first two or three years of a new car is usually minimal, basically limited to oil changes and tire rotations. Any major repairs are typically covered by the manufacturer’s bumper-to-bumper warranty, provided its mileage limitation has not been exceeded. Thus leased new cars have very few additional costs beyond the monthly lease payment, insurance and fuel. Beyond this timeframe, it is likely that maintenance costs will be necessary. Lease contracts obligate the lessee to service the vehicle regularly and repair it when needed. Ownership of the car allows you the option of waiting a few months until "you get around" to repairing the dent in the car or living with it indefinitely.

  4. All leases have a provision for normal wear and tear’’ but the definition can be open to interpretation. If you are hard on your car, leasing may not be for you. Should you return the vehicle at the end of the lease with stains and scratches throughout, you will pay dearly for your haphazard care of the car during the period of the contract. A leased car that is treated as if it had been "borrowed" from a valued friend will be accepted back without hassle or extra charges. Regular servicing and cleaning is a given. Extensive dents and upholstery stains should be addressed prior to returning the car. The lessor is looking for a car that can go straight onto a used-car lot or command the best price at an auction. Any money needed to fix the car will come out of the lessee’s pocket.

  5. As basic transportation, leasing offers an affordable way of getting .behind the wheel of a new vehicle on regular basis, every two or three years. It also allows individuals without the money for a reasonable down payment to drive at a cost that they can afford. People who like to hold onto a car for years would be better served by sticking with the tried-and-true practice of purchasing the most reliable car they can find and welcoming it into the family.

  6. Remember, there is no such thing as a "standard" lease...everything is open for negotiation. These include the following:
  1. the negotiated "selling price" of the vehicle;
  2. amount of down payment the customer must put down, in addition to the first month’s lease, before he can drive the vehicle off the lot. This can be satisfied either by cash or trade-in and is used to decrease the vehicle’s selling price;
  3. the residual value of the auto at the end of the lease. This is also called the "guaranteed future value" or the "lease-end value" and represents the projected market value of the vehicle at the end of the lease;
  4. the mileage allowance (as outlined in (c) above); and
  5. the required insurance coverage, to be borne by the lessee, to provide the difference between any insurance settlement on account of a claim arising from an accident, fire or theft and the remaining lease payments.

  1. Leasing and how it relates to income taxes is treated separately in the accompanying article "Taxable Benefits and Company Cars

  2. Generally speaking, it is more difficult to be approved for a lease than for a bank loan. This is because, although the lessor needs to confirm that the lessee will be able to make the required payments, he is also trusting him to maintain a valuable asset that he does not own. If your credit history is blemished or your ability to cover the payments depends on too many factors occurring just right, you will probably be turned down. In that case, in order to strengthen your bargaining position, if you can, offer the lessor a larger down payment to reduce the amount of the loan or offer to increase the length of the contract from say three years to four. These concessions may be enough to swing the deal.

  3. Some people like to tinker with their autos and enhance them with "aftermarket components" of their choosing. If you are this type of person, purchasing rather than leasing is the preferred route. However, if you insist on putting them on a leased vehicle, make sure that they have been removed prior to the conclusion of the lease contract.

Fall 1999 : Leasing vs Ownership of Business Assets | Introduction to Leasing | Buying vs Leasing | Taxable Benefits | Real Life Example  | Common Lease Terms

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