Leasing After 0% Financing:
The Good, Bad, and Ugly

So you're thinking about leasing, but you've heard horror stories from friends and loved ones or you believe you have been a victim of leasing because of a lack of knowledge. Let's assume you've always been comfortable with financing a vehicle for five to six years. However, after two to three years, you find yourself at the dealership trading your vehicle. To make matters worse, you realize you owe more for the vehicle than it's truly worth at the time of the trade. In the world of retail, this dilemma is also known as being “upside-down.”

Well, if Dr. Phil was a leasing expert, what would he say? Knowing him, he would probably ask, “How is that working for you?” If you're like most folks who seem to heed his advice, your likely response would be, “It is not working for me.” To tell the truth, you always chose the conventional method of purchasing a vehicle because you never could quite grasp the concept of leasing. Well, consider this: if you like to have the latest ride, if you like to turn your car in before incurring out-of-warranty expenses, if you don't want to be in an “upside-down” situation at the time of trade and if you have a credit (FICO) score in the high 600 range, leasing may be the perfect option for you. (Note: Most leasing companies will allow you to lease with a score in the high 600 range.)

Unfortunately, since September 11, 2001 , leasing has not been a popular choice with most consumers. Now, most folks lease either because of lower monthly payments or because they can roll around town in more car than they can normally afford using the traditional financing route. Nonetheless, as a result of 0% financing deals for 60 months to 72 months combined with all of the rebate money that has been available from automakers to stimulate the economy, it just hasn't made good financial sense to lease a vehicle.

However, due to the average new vehicle finance rate climbing to over 5% today, Raj Sardaram, president of the Automotive Lease Guide and the industry authority in determining the worth (residual value) of a vehicle at the end of a lease predicts, “Leasing is expected to make a strong comeback in the next few years. Within the next five to ten years, I expect leasing to account for 20% to 25% of new car sales annually.”

Are You a Lease Candidate?

Before you move forward with leasing, ask yourself the following questions. If you answer yes, you may be a prime candidate for leasing.

  • Do you prefer having continuous car payments? With leasing, it is like living in an apartment. You're always making payments without ever having ownership. Technically, you never really own any vehicle until the 60th payment, the 72nd payment or whatever finance terms you have.
  • Do you reside in a location that allows you to drive less than 20,000 miles annually? While visiting a store in the Long Island area earlier this year where Porsches, Audis and Volkswagens were housed under one roof, the sales manager reported that over 90% of his customers leased their vehicles. This is somewhat unusual for the lease penetration to be this high unless most of the lessees have a relatively high credit score and an alternate means of transportation to and from New York City where traffic is a nightmare. If you plan to drive more than 20,000 miles a year, you should shy away from leasing a vehicle unless your intentions are to buy the vehicle at the end of the lease provided you qualify for financing or you're paying the balance (residual value) off in cash.

Negotiating a Lease

Although most folks aren't aware of it, leases are negotiable. Lease prices are based on the capitalized cost, which is the selling price of the car. The price you agree to is one of the factors used to determine your lease payment. In most instances, most automakers are advertising very competitive lease payments with little room for negotiation. You'll note most advertised leases are for 10,000 miles to 12,000 miles. You can purchase enough mileage in advance that will allow you to drive up to 20,000 miles annually. Some lease companies may charge between 10 cents to 15 cents per mile to buy your miles up front as opposed to paying 20 cents to 35 cents on the back end for driving over the mileage.

It may be to your advantage to purchase the miles on the front end of the deal as opposed to paying a mileage penalty for driving over the agreed-upon miles. And just in case you don't use up all of the miles before the lease ends, don't expect a refund. If your intentions are to purchase the leased vehicle, there is no need of buying additional mileage. Also the money factor also known as an interest rate is a big factor in your payment. To determine if you've been assigned the appropriate interest rate based on your credit, multiply the money factor by the number 24. Interest rates may be negotiable. more

Provided by jeffcars.com, 7/2005

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Automotive Factoid:

In 2004, 6% of new vehicle leases were greater than 48 months.

-Consumer Bankers Association