Oregon Roads | Equipment Leasing

Introduction
With the average cost of a new car rising each year, it is becoming more important to understand the options available for financing. Leasing has become a much more widespread option available to consumers through a number of different sources including automobile manufactures, local dealerships, financial institutions, and independent leasing companies.

Because of the variety of different leasing plans available, the amount of regulation of the leasing industry, and what can sometimes be a high stress situation of negotiating a price for a car, consumers need to be well informed so they can make a decision that best fits their individual situation.

Leasing is not for everyone, and it is important for you to consider things like how long you like to keep your car, how many miles you drive your car each year, how much money you want to make available for an initial payment, and how you value ownership or equity of your car.

The basic principle of leasing is that you pay only for what you use of the car. The most frequently cited advantages of leasing are that leasing requires a lower initial cash outlay, the monthly payments can be lower than a loan, and you can usually get more car for your money. Common disadvantages are that at the end of the lease you don't own the car, and you may get charged for excess miles driven and excess wear and tear on the vehicle.

The basic principles of buying your car, either with cash outright or with a loan, is that you have or are building equity toward ownership. The main advantage is that you own the car after all the payments are made. The main disadvantage is that by the time you actually own the car, it may have cost you more that the car is worth.

Our goal is that after having read this guide you will have a better understanding of the considerations you should make when choosing to lease or buy, as well as a basic understanding of the most common terms and conditions of a lease and your rights and responsibilities as a potential lease customer.

Some Facts About Leasing
Leasing has exploded in recent years, with individual consumers accounting for the bulk of the increase.

It has grown more than tenfold in less than a decade and now accounts for more than 27% of the 15 million-plus vehicles sold in the United States. Why the dramatic upsurge in leasing?

A decline in the percentage of disposable savings of Americans and changes to the tax laws are the main causes. In 1987, more than 70% of disposable savings was available for the purchase of consumer goods. By 1993 that figure had declined to less than 40%. And this year, the percentage continues its downward slide. Additionally, the many tax deductions that favored purchasing over leasing were eliminated. Since those tax laws were changed, leasing has enjoyed a steady 2% to 3% increase per year for about the last ten years.

The Differences Between Leasing and Buying
You have decided you want a new car. Should you obtain a loan, lease, or pay cash? There are pros and cons for all three methods. You should be able to make an informed choice about what's best for you based on the initial cash outlay, money and operating costs, equity and ownership, and tax and insurance considerations.

Paying in Cash
Only about 10% of all automobile purchases are in cash. If you pay for the entire cost of your car with cash up front, it's all yours and you don't owe anyone anything. However, you also don't have that money available for investing, for other uses or in case of an emergency.

Initial Costs
Leasing almost always has one very powerful advantage over a loan...lower initial cash outlay. With leasing there is normally little initial cash required in order to put yourself "in the car." Generally, the better your credit rating, the less cash required at the start of the lease.

Usually you will be asked to provide a refundable security deposit (similar to the kind asked for when renting an apartment), the first and perhaps last monthly payment, and sometimes, at your discretion, a "capitalized cost reduction," or down payment. As with most terms in a lease, these can be structured to meet your needs.

Continuing Costs
When deciding whether to lease or to buy, continuing costs are another factor that should be considered. Continuing costs are all those costs, which are incurred after the initial costs and before the end-of-the-loan or lease costs. Although the monthly or "periodic payment" is usually the biggest portion of continuing expense, it is not the only item you should consider.

Taxes, insurance, repairs, maintenance and operating costs...all these items are part of continuing expense whether you buy or lease.

Equity & Ownership
Basically you are renting a car when you lease it. At the end of the lease, you will have no equity or ownership of the vehicle. When you are gradually building equity as you pay it off. However, you should consider the amount of money that you will have to expand over the total period of the loan in order to acquire title to the asset. Even though you will "own" the car after making all the loan payments, in all likelihood the value of the car will be worth much less than the amount that was spent in order to obtain it. And even though an asset, it is a continually depreciating one, losing more and more of its value with each passing day.

Taxes & Insurance
When you buy a car in most states you have to pay the sales tax up front in a lump sum. With leasing, you can generally amortize or spread out the sales and rental or use tax over the term of the lease.

If you lease, you may have to change your insurance coverage and your lease contract requires you to do so. Leasing will requires higher limits for insurance coverage, for both public liability and property damage (collision and comprehensive). Leasing may also require a lower deductible on your policy.

Since tax and insurance obligations do vary by state, know which requirements apply to your situation.

Other Differences
Because of the way leases are structured, the payments can be lower than loan payments. That way you can generally add more options or upgrade to a more expensive model than you can afford with a loan.

Also consider how often you want to drive a new car. Leases can have shorter terms than loans, so you can drive a new car every two or three years if that is important to you.

Closed-End Leases
In a closed-end lease, you make a predetermined number of lease payments for a specified period of time and return the vehicle at the end of the term.

Barring physical damage to the vehicle, excess wear and tear, or additional mileage beyond the mileage allocations in the lease, you have no contingent responsibility for the vehicle's value at the close of the lease.

(Note: It is important to discuss these potential additional charge items up front before you sign the lease.)

With a closed-end lease, any loss of value through depreciation of the vehicle is the responsibility of the leasing company. Most manufacturer-sponsored leases are the closed-end variety.

Open-End Leases
In this type of lease, you take the "risk" that, at the end of the lease term, the vehicle will have a market value comparable to the amount specified in the lease contract, sometimes called an "estimated residential value." If the amount the car is resold for is equal to the estimated residual value, you owe nothing. If it is not, you may owe all or portion of the difference, often called an "end-of-lease payment." The Federal Consumer Leasing Act provides a measure of protection for lessees in open-end leases by limiting the end-of-term liability to no more than the total of three monthly payments.

Initial Lease Costs
Before signing a lease, you are entitled by law to know the charges that will be assessed "up front" at the initiation of the lease agreement. These usually include the following:

Security Deposits
Not unlike the kind required when renting an apartment, this is to make money available to the lessor should you owe money at the end of the lease or fail to make payments as agreed during its term. It can also be used to cover pat-due charges or payments, excess wear and tear or damage to the vehicle, excess mileage charges, or an end-of-lease payment. If you fulfill all the terms of your lease, the lessor must return it in its entirety.

First & Last Lease Payments in Advance
Sometimes the first and the last payments are required at the beginning of the lease term in addition to a security deposit. If you have a good credit rating, the lessor may not require the last payment until the end of the lease. Unlike a loan, lease payments are always made in advance, not in arrears.

Capitalized Cost Reduction
Basically, you may have the opportunity to lower your monthly lease payment by making a one-time payment to reduce the car's "initial capitalized cost." The capitalized cost is the total cost of the vehicle, including any fee, insurance, maintenance contracts or options you request.

As in the case of a loan amount, the more you put down initially, the lower the monthly payments. However, by putting down a large amount in an attempt to reduce your monthly outlay, you also negate one of the primary reasons for leasing-little or no initial cash outlay. An alternative might be to trade in your current vehicle to defray the capitalized cost reduction amount.

Acquisition Fees
You may also be required to pay "acquisition fees" at the inception of the lease. This fee covers costs of originating and processing the lease, costs which include administrative functions associated with handling the lease paperwork.

Salex Taxes, Titles & License Fees
In most states, when buying a car with a loan or cash, sales tax must be paid in full on the entire value of the vehicle at the time of purchase. IN other states, you are permitted to include taxes in the loan amount, and by doing so you will be paying interest on the amount of taxes financed.

With leasing, most states permit leases to be taxed on each monthly payment rather than on the entire value of the vehicle. The rationale behind this is to tax you only as you consume the vehicle's value.

Tags, title and license fees are the responsibility of the lessee just as they are with a loan. These fees can be paid up front, or included in the capitalized cost of the leased vehicle and amortized over the life of the lease.

Insurance
You must be provided all insurance requirements and information by the lessor when entering into a leasing contract. Either the lessor can provide the insurance (he must disclose any cost to you) or you can provide your own insurance through your existing insurance carrier. Since leasing may require higher limits for insurance coverage's than what you presently carry, you must be informed in the lease agreement of the type and amount of insurance required.

GAP insurance may also be offered to you with a lease. Should you have an accident and the car is totaled, GAP insurance will cover the difference (the gap) between what is owed on the lease contract and the amount that the primary insurer will cover. This is most important in the early years of a lease, when the difference between the two amounts is greatest. GAP insurance is relatively inexpensive, considering the peace of mind it can provide.

Your Lease Obligations & Responsibilities
Leasing provides great flexibility; however, like a loan or a cash purchase, there are costs and expenses associated with operating, maintaining and repairing vehicles, items it is your responsibility to pay.

Periodic Payments
The lessor is obligated by law to provide you the following information, verbally and in the lease agreement, about your periodic payments:

Repairs & Maintenance
You will be responsible for repairs and maintenance when you lease, just like "normal wear and tear" and "reasonable maintenance" can easily be misunderstood, make sure your repairs and maintenance responsibilities are spelled out specifically in the contract and that you understand them before signing.

Warranties
All warranties must be disclosed to you. While the terms of these warranties vary greatly, you are required to follow the maintenance and repair schedules specified in order to keep the warranty coverage.

Extended Service Plans
Because warranties differ so much in their terms, the lessor may offer an extended service plan. These are normally described as "extensions" of existing warranties. If you are considering a short term lease, most major repairs will likely be covered under the manufacturer's warranty. Whether you choose a short term lease or a long term lease, you may want to consider the service benefits offered in these types of plans like emergency road side assistance and rental car allowances. Simply be aware of all the provisions included in the plan you are considering before signing.

Vehicle Registration & Use
While leases may include restrictions on moving the vehicle out-of-state, they do not normally include limitations on permitting other family members to drive the car. However, you are responsible for any applicable renewal registration fees or property tax obligations required by your state, whether you choose to lease or own the vehicle.

End-of-Lease Considerations
Aside from initial and continuing monthly lease costs, there are final costs associated with leasing you should be aware of. These include charges for excess mileage, excessive wear and tear, a vehicle resale charge and an end-of-lease payment. Let's take them one at a time.

Charges for Additional Mileage
Most closed-end leases stipulate a set number of annual miles you may drive. If you exceed this allocation, you will be charged for every mile over the predetermined annual limit.

Negotiate a mileage allowance that fits your driving habits before signing a lease. You may be permitted to "purchase" additional miles up front at a lower rate.

Default Penalties
If you default on your lease obligations of fail to make your payments, the lessor may repossess the vehicle and/or assess the costs or penalties stated in the lease. These may include forfeiture of your security deposit, immediate payment of all remaining obligations and the cost of legal fees to reclaim the vehicle.

Excessive Wear & Tear
All leases contain stipulations making you responsible for "excessive" wear and tear greater than "reasonable." To avoid any misunderstandings, be sure that specific definitions of "excessive" wear and tear and "reasonable" are included in your lease agreement.

Vehicle Resale Charges
You may be charged for preparing a vehicle for resale after you have turned it in at the end of the lease. Such charges normally cover cleaning, tune-ups and detailing. Be aware of this charge and what items are included when you sign the lease. Some leases call these charges disposition or disposal fees.

End-of-Lease Payment
This is a charge for adjusting the depreciation expense only in open-end leases. It covers the difference between what your lease states should be the value of your vehicle at the end of your lease (also known as its "estimated residual value"), and what its actual net resale value, or its appraised value, is. In open-end leases, the lessor will either sell or appraise the vehicle when you return it and compare the net sale proceeds with the value stated in your lease. You will pay any difference between the book residual value and the net proceeds of the sale.

Option Rights
You have several options at the end of your lease. What you decide to do depends largely on your particular circumstance.

Purchase Option
Your lease agreement may include the option to purchase your vehicle at the end of your lease. If you want this option, be sure to negotiate it before signing. Without it the lessor has no obligation to make the vehicle available to you for purchase at the end of the lease. He must also disclose the purchase price or the formula for determining the price before the lease is signed if he is offering you a purchase option lease.

Right to Extend or Renew
This is an option that can either be negotiated at the end of the lease term if the lessor is willing. The extension option can often reduce your lease costs if it is negotiated up front.

Right to Early Termination
A lease is a binding contract. Like all contracts, the two parties negotiate its terms. If you think getting out of the lease before its completion is something you might have to do, ask that a provision for it be in the contract.

However, there is almost certain to be a cost for this provision, often called an "early termination clause." In many cases, you will be required to keep the vehicle for at least 12 months before exercising any termination option. If you terminate early, you will usually incur extra charges and penalties for doing so. The circumstances under which such penalties and costs are invoked, and the formula used to determine these charges, must be disclosed to you by the lessor before signing any contract.

Reassignments
The lease is your lease. The contract is with you. Since you do not own the vehicle, if you assign your vehicle to a third party without the lessor's specific permission, you are in violation of the contract. Any and all financial responsibility resulting from such third party reassignments is yours. Work closely with the lessor if you think third party reassignment is necessary. That way the terms can be negotiated so you will not suffer any undue financial obligations.

Whether you decide to lease or not, be sure to keep two things in mind.

First, a lease is an important legal document. It entitles you to certain rights but also binds you to certain duties, liabilities and obligations. Know what you are signing before you sign it.

Second, most elements in a lease can be structured and adjusted to meet your needs and situation. Make sure you work with the lessor to create the lease that is right for you.

Basic Advantages and Disadvantages

Advantages: Leasing vs. Buying

Disadvantages: Leasing vs. Buying

Additional Consumer Resources
FRB: http://www.bog.frb.fed.us/pubs/leasing/