Leasing a vehicle

Step 1: Deciding to lease or buy

Leasing vs. buying

Leasing is based on the concept that you pay for the vehicle’s depreciation during the time you drive it. When you lease, you are essentially renting the vehicle for a number of years. You have the option of making a down payment to reduce the size of your monthly payments, and pay a money factor, which is similar to interest on a loan.

The money factor is calculated by expressing the interest rate as a decimal, i.e. 10 per cent = .1, then dividing that number by 24. You can also get the amount by multiplying the money factor by 2,400 to convert it to an approximate annual interest rate.

Leasing may be for you if you like to drive a new car every few years, want to keep your payments lower, and don’t mind the restrictions included in most lease arrangements.

Buying a car may be more expensive initially, but you’ll end up with equity in your vehicle, i.e. an asset you can sell. From a dollars and cents standpoint, you are usually better off buying rather than leasing.

Pros and Cons of Leasing

Advantages:

• Lower down payment if desired
• Lower monthly payments
• New vehicle every few years
• Eliminates trading in and selling the vehicle

Disadvantages:

• Confusing process
• Restrictions/conditions/penalties placed on use
• Potential to cost more than conventional financing
• No equity at end of term

Loans vs. leasing

When you compare lease payments with loan payments, that monthly figure shouldn’t be your only consideration. Remember that at the end of a 36-month lease, you either give back the vehicle, or buy it out. The residual value owing on the vehicle is often quite high. You may have to finance the remaining amount over another three or four years, at which time, the vehicle maybe be six or seven years old when it’s paid off.

Use the federal government’s website to help you decide whether you should finance or lease with their calculator.

How long should your lease be?

Lease agreements range anywhere from two to five years. A three-year lease may be the best option for a number of reasons:

• Many manufacturers offer three-year warranties, which means with a three-year lease, your vehicle will always be under warranty.
• A four or five year lease means you may have to pay for repairs and consider an extended warranty for added protection if the vehicle is only covered by a three-year warranty.

Payments can be lowered even more with an extended lease, but by extending a lease, you’ll end up paying more in the long run for something you’ll never own.

Step 2: Check the ads – carefully

Lease ads may look great. You might assume you can drive away in a brand new vehicle for $200 per month. Take a close look at the ad and read the fine print. What may appear to be the deal of a lifetime may not include GST. You may have to come up with a large down payment to secure an acceptable monthly payment. The lease term may also be much longer than what you are looking for.

What to look for

• Incentives and rebates: Some auto manufacturers offer incentives to spur the sale of slow-selling vehicles. Car ads are an important way to learn about this financing method. It’s a good idea to apply a rebate or incentive to the down payment, which will lower your monthly payments.
• Additional taxes: GST is rarely included in the figures quoted in advertisements.
• Length of the contract: Some monthly payments look good until you see the term of the loan; $399 a month might be manageable for 36 months, but stretched over 48 or 60 months it becomes less of a bargain.
• Available models: Some models qualify for big savings. Others don’t. Read the fine print.
• Interest rates: Dealers may offer low interest rates available through the manufacturer. These rates can be better than bank loans and save you money over the term of the loan. Don’t forget to check traditional institutions such as banks and trust companies.

Shop around and compare

Different leasing companies offer different deals. Don’t use monthly payments as the only comparison.

• Examine all conditions and requirements carefully.
• Determine the annual mileage limits, penalties for early termination, the definition of normal wear and tear, and any other conditions imposed on the use of a leased vehicle.
• Avoid open-end leases in which you must guarantee the residual value of the leased vehicle at the end of the term. Closed-end leases that allow you to walk away from the vehicle are preferable.

Step 3: Negotiating the lease

Just like buying a car, when leasing, almost everything is negotiable. There are a few things you should know before you commit to the deal.

Beware of looking at just the monthly payment. This is a common mistake. Before signing a lease, look at all the payments, including additional monthly charges as well as those added to the beginning and end of the deal.

What you need to know

• Before you start, find out the manufacturer’s suggested retail price (MSRP) of the vehicle. Use Gold Book to research the value. When you and the dealer agree on a price, this becomes the capitalized cost or cap. cost of the vehicle. In a good deal, the cap. cost is less than the MSRP.
• The best lease agreements are those with a low lease price on a vehicle with a high residual value, which is the wholesale value of a vehicle at the end of the lease. Residuals are usually a percentage of MSRP. Generally, the best vehicles to lease have a 24-month residual worth at least 50 per cent of their original MSRP value. The higher the residual, the lower the lease payments.
• The money factor or lease rate is another important negotiating point. Money factor is the interest you’re charged by the dealer for their financing of the vehicle. The money factor should be comparable to, if not lower than, local new-car loan rates. The money factor is expressed in terms such as .0033. To convert it to the interest rate, multiply by 2,400. Just like interest on a loan, the lower the money factor, the lower your monthly lease payments.
• Other negotiable items are excess mileage charges, and dealer extras. Make sure you understand and agree with all the extras and conditions of the agreement. Ask questions if you’re unsure about anything.
• Some up front charges will apply; these commonly include air conditioning tax and tire taxes. Most leases require a one-month down payment and a security deposit. The security deposit may or may not be refundable. Make sure the contract specifies whether you get your deposit back or not, which you can negotiate.

Step 4: Before you sign

Entering a lease agreement is like buying a car. It’s a legal, binding contract, so make sure you understand exactly what you’re paying for. Check for additional features that you may or may not have requested. Ask to have any unwanted extras removed and do not sign the agreement until you are satisfied.

Every lease includes a maximum number of kilometres you’ll be allowed to drive, generally 20,000-24,000 kilometres per year. If you drive more than your specified amount, you’ll be required to pay for going over the limit. If you think you might drive more than the specified mileage, ask if you can increase the allowance beforehand. You may be able to purchase or negotiate a higher mileage allowance and add the cost to your monthly payment.

Ask questions about how you can use the vehicle:

• Can you tow a trailer or drive it out of the country?
• What about additional drivers?
• Can you make any modifications to the vehicle?
• If so, what are they?
• What are the expectations regarding vehicle maintenance?

Ask about options for terminating the lease:

• Is there a penalty to do so?
• Find out if you can have someone assume the lease agreement.
• If necessary, would you be permitted to sell the vehicle?
• Make sure you understand everything about the agreement before you sign, because once you do, the deal is firm.

Gap protection

Many insurance companies offer insurance to cover the difference between replacement cost and what you owe on a lease. Contact your AMA Insurance agent to discuss coverage options for your leased vehicle. Be sure to ask about loss of use coverage and glass coverage. Also ask about replacement insurance, which waives the depreciation on replacement resulting from an insured peril within 30 months of the date on which the vehicle was delivered to you.

Step 5: Getting out of a lease

Most lease agreements do not allow you to buy the vehicle or terminate the lease before the term is up. Some lease companies charge from six-months to a year’s worth of payments for early termination.

There are some options you can explore:

You can find someone to assume the lease and take over your payments. Make sure your dealer allows this.

Check with the dealer to see what you owe and if you’re permitted to sell the vehicle.

Turn the keys over to the dealer and pay the balance. This is the quickest and most expensive option.

Modifications/damage

It’s not a good idea to modify a leased vehicle, mainly because it’s not yours. You are renting the vehicle. In the end, you’ll pay twice for modifications – when you buy them and when you are charged at the end of your lease agreement.

You’ll also be charged for damage to the vehicle in excess of normal wear and tear. Before you sign the agreement, make sure you understand the agreement’s definition of normal wear and tear. Get everything clearly written into the agreement so you’re not surprised by inflated charges at the end of the lease.