Vehicle lease running out? Brace yourself
One of the casualties in this recession has been leasing programs run by certain auto manufacturers. Chrysler Canada, for example, still has not resumed leasing as a financial option.
Even those automakers able to keep on leasing have learned some valuable lessons and changed their game plans.
Leasing still remains a popular choice for new vehicle financing. About one in every two vehicles that crosses the curb is leased, not purchased.
It’s time to draw you the latest picture.
First a primer on opting for leasing over purchasing. With leasing, instead of financing the entire purchase price of a vehicle, the consumer finances the amount his or her vehicle will depreciate over the term of the lease (anything from three to five years).
If John Driver chose a new $40,000 sport-utility vehicle for a three-year term and the automaker’s financing arm assumed the vehicle would be worth $20,000 at the end of the contract, then John would make monthly payments to cover $20,000-worth of depreciation plus interest.
However, there are more conditions than just time when writing up a leasing agreement.
The end value of the vehicle will depend on the mileage driven, so the contract stipulates a limit (usually 20,000 to 25,000 kilometres per year).
In addition, the auto maker will demand a certain level of maintenance and repair because the overall condition and mechanical fitness of the vehicle has a lot to do with its value.
Market conditions can change values overnight, so the leasing company will be cautious with its end-value to avoid massive losses when the vehicles are returned at the end of the term.
These leases, where the end value is guaranteed (providing wear and tear and mileage limits are met), are called ‘closed-end’ and represent the majority of leasing contracts signed in Canada.
The alternative ‘open-end’ leases leave the vehicle’s end value up in the air until the lease is over. This is extremely risky for the consumer who is unable to control market forces or retailer whims. This lease should be avoided at all costs.
Of course, purchasing simply calls for Mr. Driver to finance the entire $40,000 price of his 4X4 over an agreed upon loan term and interest rate and at the end of this time span the vehicle is his outright.
If he leased, Mr. D. would have the option of simply dropping off the vehicle and leasing or purchasing another or buying the leased vehicle outright.
Historically the benefit of leasing was to lower monthly payments or to allow the consumer to drive more vehicle for the same money. Say you could only afford to finance the purchase of a $20,000 vehicle. By leasing, you could lease a $40,000 vehicle for roughly the same money.
But there’s always a catch. With leasing, you must predict your average mileage very accurately. Maybe your four-year contract stipulates 20,000 km per year. After two years you change jobs or move farther out from work. That leaves you paying a substantial penalty for going over your mileage limit (up to 12 cents per kilometre in some cases).
Then there are snags that bind you to the leasing dealership. If you want to end your lease early or buy it out at the end, most contracts will only permit the original dealer to complete the transaction or receive the all important buy-out figure from the leasing company.
If you and they have parted ways during the lease (over some controversy or customer dissatisfaction issue) then you’ll not likely look forward to wrapping things up with them at the end of the lease. This happens more than you might think).
Over the last few years, many leasing companies or divisions have been exercising their wear and tear clauses vigorously in order to minimize losses when disposing of returned leases at wholesale auctions or on dealership used car lots.
While worn brake pads and tires and a few scratches or dents at one time might have been overlooked during end-of-lease inspections, now they can lead to major costs. They take a lot of leasing clients by surprise.
In fact, this is so common that many manufactures offer ‘wear-and-tear’ protection at an additional cost to avoid alienating consumers.
Photograph by: Peter Jones