Leasing After 0% Financing
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Pitfalls of Leasing
Most leases are expensive to end early. If you purchased a vehicle utilizing the traditional financing method, you would also lose on the depreciation in case you decided to trade the vehicle for another one within the first twelve months. If you think you may want to break the lease early, occasionally an automaker may waive up to six months of your final payments without a penalty provided you're not over the mileage and you purchase another vehicle by the same car maker. According to the Consumer Bankers Association, 22 percent of the leases in 2004 did not reach their full term. Beyond the low monthly payments, there are pitfalls to leasing.
- You never own the vehicle. The overall cost of the vehicle could possibly be lower had you utilized the traditional financing method.
- If it's not required, think twice about the down payment. It helps to lower the note although the overall cost of the lease will remain the same. In case you total-out the vehicle or it's stolen, you'll lose your down payment. Your personal insurance and the gap insurance coverage typically included in the lease will pay off the car. But your down payment will never be seen again because it was used at the beginning of your lease to reduce the monthly payment.
- Although you don't own the vehicle, you're responsible for repairing it in case you're involved in a minor fender bender or a major accident.
- If you like to drive a lot, you're limited to the number of miles you can drive. If you choose to drive over the agreed upon mileage, you will more than likely incur a mileage penalty.
- If you like to customize your vehicle with specialty paint jobs or nonauthorized factory spinning wheels, don't expect to do it with a lease vehicle.
Leasing Beyond the Warranty
If you�re still considering leasing a vehicle, you should determine how long you're planning on keeping the vehicle. On the average most new car warranties run from 3 years or 36,000 miles to 4 years or 48,000 miles. Why would you lease a vehicle beyond the basic new car warranty? Most people prefer having a relatively maintenance-free vehicle during the lease period. When I asked Raj Sardaram, the industry leasing expert to the automakers, about automakers offering a four year or a five year lease, here is what he had to say, �I think it's great! However, the value begins to depreciate significantly in four to five years.� Unlike Sardaram, I believe if you're leasing a vehicle for more than three years you need to reassess why you're leasing, unless there is an obvious tax advantage.
The Lease Is Ending: Refinance or Turn-In
Depending on your contract you may have a few options or you may not have any based on the wording. As long as you maintained the lease vehicle with relatively few dents and dings and stayed within the mileage, you can typically walk away from the lease unless there is a disposal fee written into the contract. Or based on your credit, you could keep the vehicle and refinance the residual value.
It only makes financial sense to refinance the vehicle if the cost is less than what the same vehicle is going for on the used car market. You're probably asking yourself how you would find that out. Check around in your local newspaper or with several dealerships to determine the current value of your vehicle. If your vehicle is selling for $2,000 to $3,000 less on the used car market than the residual, you should try to renegotiate your residual with the finance company or strongly consider purchasing another vehicle.
God forbid during the lease period that you were delinquent on those monthly lease notes as well as other financial obligations due to a financial hardship, you will have problems securing future financing for any vehicle. If you can't locate any source of funding to refinance the residual balance of the lease vehicle, where do you turn to? You could possibly seek a cosigner, find alternate transportation or if you're really desperate, enlist the services of a buy-here, pay-here dealer. Had you financed the vehicle from the onset you wouldn't have to worry about being requalified for financing.
So before you place yourself in the driver's seat and sign the dotted line of the contract, evaluate the total cost of leasing or financing the vehicle and read the fine print. As Judge Mablean Ephriam of Divorce Court says, �Before you leap, look deep.� Hence, the same message also applies to leasing.
