The Advantages of Leasing Rather Than Owning
Would you purchase a home or invest in a stock knowing full well that in two years it could be worth only 50% of your original investment. The answer is obvious, of course. However, that is what happens when you purchase an automobile or truck.
Most people continue to buy rather than lease because they do not have a full understanding of how leasing works or because it is just the way they have always done it in the past.
Rule #1 – Purchase things that APPRECIATE
Rule #2 – Rent or Lease things that DEPRECIATE
There are REAL advantages to leasing! Consider the following:
A Lease provides lower monthly payments than debt financing. Term for term, lease payments can be from 15% to 40% lower than conventional loan payments.
A Lease requires far less or no down payment to achieve the same or lower payment as a purchase. Usually the only cash required is the first payment, which leaves you cash for home purchases, investments, retirement accounts, accelerated payments on higher interest rate credit accounts, cash reserves or emergencies.
Leases are generally easier to qualify for than debt financing, because lower credit scores may get the same or almost identical rent or money factor used in calculating payments as perfect credit or higher credit scores. There are more significant variances in obtainable interest rates with conventional loans than with lease money factors.
Leases can shorten your ownership term to just 24 to 42 months rather than 48 to 72 months with debt financing, which allows you to change to a newer model more often. It can be an unpleasant shock if you try to trade a vehicle in 36 to 42 months that was financed for 60 to 72 months. Usually you will find you have very little to no equity or even worse, you owe more than the car is worth putting you into a “negative equity” situation.
Leases include Guaranteed Auto Protection (GAP). Customers who lease have no risk should the vehicle suffer a total loss during the lease period, through accident or theft. Insurance companies pay the actual cash value for total losses and as mentioned above most vehicles have little to no equity during the first 75% of the life of the loan. That makes you financially responsible for any deficiency balance due. GAP insurance covers any difference and is paid for by the leasing company. This same coverage on a conventional loan can increase your monthly loan payment by $6.00 to $12.00 per month. We all know that a vehicle that has been involved in an accident is worth less than one that has not. That is referred to as “diminished value.” If you have an accident with a vehicle you have financed conventionally that diminished value is yours. With a lease, if it is repaired with new parts to industry standards, it keeps the same residual value and you cannot be penalized. In other words, the diminished value transfers to the leasing company.
A lease eliminates the down side depreciated future value risk. In today’s rapidly changing auto industry there are more models, designs and futuristic technologies that can quickly impact the market value of your car. It may have been hot and in demand when you bought the vehicle, but what will demand be in 36 to 60 months? Why not let the lender assume the risk instead of you? In a lease, the future value is guaranteed. Currently residual values on Infiniti models are high while money factors or rent charges are low.
A lease gives you the benefit of the upside when the trade in value is higher than the guaranteed residual value. With a lease, your quoted payment generally will be your worst-case scenario as far as what you will end up paying for your new vehicle. It can only get better! Why do we say that? You can drive it and realistically may even be able to end the lease a few months earlier than contracted with early termination programs. You may find that the trade-in-value ends up higher than the guaranteed residual value. In this case you can benefit from the increase in appraised value, thus earning some additional equity you hadn’t planned on that can be used towards the purchase of you next vehicle. If it appraises for less, you use the guaranteed residual in the lease contract and simply turn in the vehicle and walk away with no further obligation. You also have the option to buy the vehicle at the end of the lease for the residual value plus a $150.00 charge, should you decide that you like it well enough to continue to drive it.
“I drive too many miles to lease.” Well if you are a consumer driving more than the average, (13,500), a lease may be an even a better value. Why? It is easy math. If you drive 18,000 to 30,000 miles per year, you can purchase additional miles in the lease contract for just 10 cents per mile. Over a 39 month lease that expense amounts to just an additional $975 to $4875 dollars. Now think what the additional reduction in trade value would be if you were to trade a 3-year-old vehicle with almost 15,000 to 54,000 more miles than the average similarly equipped vehicle. It will probably be a far greater amount than the prepaid 10 cents per mile in the lease contract.
Low mileage lease contracts of 10,000 to 12,000 miles can also make sense. With low mileage lease programs, the residual value is increased which will lower the monthly payment.
At the end of your lease period, you may. a.) Just elect to just turn in the keys, or b.) Select your next vehicle and have no negative equity to contend with. While not a given, with a lease you may even be entitled to a tax credit toward the purchase of your next vehicle. The credit typically saves sales tax on the residual value being applied as if it were a trade-in.
When you use conventional financing to acquire a vehicle, the payment becomes the best-case scenario. It can only get worse! Why do we say that? If you have worked to a payment utilizing a term that is longer than what you end up keeping the car before wanting to trade, you will usually find you either can’t trade at that time or it is going to require either additional cash down or rolling your negative equity into the next loan, or a combination of both. There is also a myth that interest rates on conventional loans are cheaper than leases. This really isn’t true. Actually, there aren’t any interest rates directly involved in calculating lease payments. The lease payment is a combination of one, the depreciation plus two a rent charge. The depreciation is merely the difference between the price your vehicle is sold to you for minus the residual. This amount divided by the number of months in your lease is part one of the payment. The second part is the money factor or rent charge, which is different for almost every make, model and lease term. Once the lease company has covered the project loss in value they will incur, they need to cover the interest expense they will incur over the lease period plus a small profit for being the risk taker and administrator. Demand can dictate what the profit will be in each money factor. In some cases even this is subsidized allowing the manufacture to lease more of a particular model based on inventories and marketing strategies.
A lease brings the assurance that you can change vehicles without worrying what the used car market in general may be like or what may happen in the market on the vehicle you purchased. Consider the plight of the Ford Explorer owners. They once had strong resale and trade-in values for several years. All that changed dramatically when concerns about tire blowout, instability and turnover problems surfaced. Customers who bought those vehicles believing they would have equity when they were ready to trade got a huge, unpleasant surprise. The lease customers did not suffer those adverse losses in value.
Nobody has a crystal ball to see what the next new hot vehicle might be or what changes to the currently hot vehicles might steal the demand from what was HOT and make them Not So Hot. Total discontinuation of a make or model, radical design or technological changes, as well as manufacturer’s incentives to purchase current model are just a few things that can alter the demand, and decrease trade values for the previous darlings of the industry.
The fact remains – the only customer who may be better off buying rather than leasing in today’s auto market is the customer who keeps a vehicle for 5 to 8 years and doesn’t want the newest styling, technology and safety.
These are just some of the reasons why that you just may be much better off by leasing rather than purchasing.
Danny Mayer has been the automobile business since 1969. It has been his entire career and remains his passion today. He has sat in the chair of virtually every executive position in the industry, from single point franchises to the largest publicly owed automobile corporations. He has proven time and time again that “…creative, at the edge thinking drives success…” That is probably why General Motors of Canada tapped Danny to assist them in developing and introducing a new Customer Satisfaction program for that nation’s dealers and why Nissan Corporation asked him to participate, as 1 of 3 dealers nationally, in developing the Internet process for all Infiniti dealers. He knows the automobile business…he knows the Internet…and he cares about customers. He can be reached at [email protected].
Additional articles may be viewed via Danny’s “Street Talk” main page