Thinking of Leasing a Car?
Arm yourself well
The auto-acquisition arena still feels a little like the Roman stadium of old. With the lions of auto sales salivating at the mere sight of a tender, tasty buyer, it behooves us to arm ourselves with the facts before we venture into their dens.
While the terms and definitions surrounding leasing can make even the most sophisticated head spin, the long and short of it is that leasing is just one more way to pay for something you want to buy. It’s a form of financing where you make payments on a pre-agreed percentage of the purchase price, while the remaining amount, referred to as the “residual value”, is left as a lump sum for the end.
Naturally, you’d never buy something without knowing the cost, right? You’d be surprised at the number of people who focus only on their monthly payments, giving no thought to the overall cost of the item. The result: they end up paying thousands more than necessary because they haven’t participated in the required haggle dance of leasing.
In leaseeze, the “capitalized cost” is the selling price of the item you’re leasing — if you were buying the car, this is what you’d pay. And the lower the capitalized cost — this is where the haggling comes in — the better a deal the lease will be. Make sure this amount is written directly into your contract.
You’d also never buy something on credit without knowing your financing charge, right? In the good old days leasing companies usually didn’t tell us what they were charging in financing fees, which, of course, was a license to skin consumers. Today dealerships provide the lease interest rate to consumers. Unfortunately, if you’re only focused on the monthly cost (Can that bigger, better, more beautiful car only be another $200 a month?) then you’re likely to get eaten alive.
Often, as with most large purchases — automobiles are second only to houses in term of most people’s big-ticket purchases — a down payment is required. This is an amount that is paid up front, part of which goes toward the lease, part of which pays for things like freight and PDI, air tax, gas tax, admin fees, and the last part of which is the first lease payment and security deposit all of which is added together and then upped by your provincial sales tax rate. Yep, the government has to get its pound of flesh too.
When it comes to the terms of the lease, there are basically two types of leases. The closed-end lease means the leasing company guarantees the residual value. It’s also called a “walk-away” lease because if the leasing company overestimated the residual value so that there’s a difference between it and the vehicle’s wholesale value, you’re not on the hook. With an open-end lease, you guarantee the residual value and if the vehicle is worth less than estimated, you must buy the vehicle or pay the shortfall.
As with any new vehicle purchase acquisition, the minute you drive off the lot the vehicle is worth a whole lot less than what you still owe on the lease; this is referred to as “depreciation”. The leasing company won’t eat that depreciation if your car is stolen or written off during the lease term. Instead, the leasing company will usually take the number of payments left, multiply by the months left in the lease, add the residual value, and possibly a further penalty for early termination and come up with the amount you still owe on the lease. They then subtract the wholesale value of the vehicle and the balance, which is almost always negative, is what it will cost you to buy your way out. This can be a pretty tough pill to swallow, particularly if you’re also trying to replace your wheels. You can buy insurance to cover this — called Guaranteed Asset Protection, or GAP, insurance — which will pay the difference between what your car is worth and what you still owe the leasing company if the vehicle is written-off or stolen.
The other thing to watch for is the mileage allowance (leasing terms haven’t been metricized.) Most leases give you an allowance of between 18,000 and 24,000 kms per year. Drive more kilometers and you’ll pay a penalty because you’ll be reducing the vehicle’s residual value. If you know right off the bat that you’re going to put more than the allotted kilometers on your car, purchase a greater kilometer allowance at the start of the lease. It’ll be cheaper than paying the per kilometer fee at the end. And check to see if the leasing companies will reimburse you at the end of the lease if you purchased extra kilometers but didn't use them. If you’re planning to buy out the leased vehicle, you don’t have to think about this since the fee is waived when you purchase the vehicle at the end of the lease.
Leasing looks like an easy way to get that new car you need, want, just have to have. But marry your desire with ignorance and you’re just begging to be devoured. Do a little footwork, a little homework, and some creative negotiating, and you can end up in the driver’s seat.