By Tino Rossini | November 30, -0001
In recent years leasing has increased in popularity. Did you ever wonder why? As vehicles have increased in price, leasing makes them more affordable. With a lease you only pay for the portion of the vehicle that you actually use.
There are numerous other reasons that leasing a vehicle can be advantageous to both you and a manufacturer. However, the bottom line is always one of making the product affordable, and giving the customer added value.
The challenge is that most people find leasing a "dark science", with monthly payments advertised all over the place, and always a myriad of fine print to increase the confusion.
In reality leasing is quite simple once you are aware of the basic components. Let's take a look at the components of a vehicle lease.
Open End: The lessee is responsible for the residual value of the vehicle at the end of the lease.
Closed End (Walk Away): The lessor is responsible for the residual value, the lessee has kilometers, and vehicle condition restrictions. This is by far the most popular type of lease.
This is the duration of the lease in months. Most current offerings are 36 months, which also coincides with the duration of most new vehicle warranties.
The price that you are paying, the selling price for the vehicle that you are leasing, and yes this price in most cases is negotiable.
CAPITAL COST REDUCTION:
This is the down payment if any, to reduce the capital cost, and monthly payments. Most leases require a down payment. The capital cost reduction is taxable, and should not be confused with the security deposit, which is the equivalent of 1 monthly payment.
The established value for the vehicle at the end of the lease. In most cases the residual value is a percentage of the MSRP (Manufacturer Suggested Retail Price) for the vehicle that is being leased. The lessee does not pay any taxes on the residual value during the lease.
The monthly payment is generated by all of the preceding items: term, type of lease, capital cost, capital cost reduction, and residual value. The monthly payment is taxable.
Keep in mind that most leases are structured to generate a low monthly payment, which is appealing to the customer. However, when you consider a lease, it is to your advantage to know how much value and peace of mind you are receiving from the lease. You do not own the vehicle, you are paying through the lease for the portion that you will be using, and you require good value for your money.
The following will affect your peace of mind during the lease.
In the event that the vehicle is lost, the difference between what your insurance will pay, and the value on the books of the leasing company - this is the Gap, the gap insurance will cover this difference if any.
Is there a penalty for early termination of the lease? It is to your advantage to know all the specifics of early termination. In some cases there could be severe penalties for an early termination.
You should ask and know at what rate the lease is being calculated. This can vary from various financial institutions, as well as dealers.
A fee to process the lease agreement, this can vary, and can also include a fee from the financial institution that is acquiring the lease agreement.
Most leases require a security payment, usually the equivalent of one monthly payment. Be certain that it is refundable at lease termination.
Closed end (Walk Away) leases all contain a kilometer clause, and a charge for excess kilometers above the specified number. You should know what the charge is per kilometer. Also, in most leases the kilometer clause can be adjusted to your specific usage of the vehicle.
WEAR and TEAR:
Be certain that you know the exact stipulations of the wear and tear clause. Specifically what is considered normal usage, and what is considered abnormal. You do not want surprises at lease termination.
You want an easy-to-understand, peace of mind lease that is personalized to your requirements and budget. Keep in mind that you do not own the vehicle, and that at lease termination on a Closed End lease you are accountable/responsible for the condition and kilometers on the vehicle, but not the residual value, which is the responsibility of the lessor.
Always consider the entire value package of a lease: the vehicle, all the lease parameters, who is the leasing company / financial institution, and the degree of flexibility during the lease term.
Although a lease seems complex the reality is that with a lease:
- either the vehicle is more affordable or you can afford a more expensive vehicle,
- the initial cash outlay is less than a direct purchase,
- you will know the exact cost of the vehicle for the duration of the lease,
- and you are not paying taxes on the residual value.
At lease termination you can simply walk away if its a Closed End lease, exercise your purchase option if you want to keep the vehicle, or initiate another lease on a new vehicle.