A recent article in Automotive News contained the headline that “Automakers Return to Leasing.” For many of the last several years, banks and finance companies reduced their leasing programs because of low residual values attached to the vehicles being leased. However, now the same factors that are causing used car prices to go up are supporting higher residual values and, in turn, lower payments for the customer. Higher residuals mean that the customer borrows less, monthly payments are less, and leasing is again attractive to consumers.
Leasing is simply the use of a vehicle for a definite period of time in exchange for monthly payments. At the end of the lease, the consumer has the option to return the vehicle with no further obligation (provided there is no breach in terms of the lease) or buy the vehicle from the lender.
Leasing was not an attractive option in past years because used car prices were depressed. The used car market suffered a double whammy with high gas prices and a depressed economy forcing prices downward. Lower used prices also lowered residual lease values which translated into less attractive lease terms and payments. In late 2009, the Cash for Clunkers program reduced the inventory of used vehicles and manufacturers reduced new production considerably. This led to a turn in the market of used vehicles, increasing the average used car price. Now residual values are up and leasing is a good option for many buyers.
Many consumers avoid leasing because they think that leasing requires restrictive terms or conditions. Some common objections include driving too many miles, not wanting to be locked into a lease, or assessments for minor damage to the vehicle when it is turned in.
Most mileage objections can be easily overcome. A standard lease gives the driver a certain amount of miles per year. If more miles are needed, they can be added by purchasing additional miles at the beginning of the lease for a discounted value. The discounted value is far less than the depreciated mileage that exists if the vehicle was purchased (rather than leased) and traded in with excess miles. A customer who has high mileage on a traded vehicle incurs the excess mileage charge in the form of a lower trade value. Additionally, excess miles can be purchased in the middle of the lease term if the driver sees that standard mileage would be inadequate. Again, options exist for buying miles at a discounted value.
Some consumers are concerned about being locked into a fixed term with the lease. However, anyone who finances a vehicle is locked in for the term of the agreement unless the balance of the note is paid. When a customer purchases a vehicle on a 60-month term and tries to trade after 36 months, the customer is “upside down” on the note and usually must come up with out-of-pocket cash to make up the difference. If the same customer had leased for 36 months, the leased vehicle could be traded with nothing more than a first payment and security deposit on the new lease vehicle.
Finally, customers often ask about damage to leased vehicles. Again, the same is true whether the vehicle is leased or purchased. With a leased vehicle, any unrepaired damage will be charged back to the customer. With a purchased vehicle, the charge for damage is reflected in a lower trade value. Simply put, if a leased vehicle is turned in with damage in excess of what would be considered “normal wear and tear,” then the customer must either repair the damage or pay for its repair before terminating the lease.
Leasing is an option that should always be considered when looking for a new vehicle. It is simply an alternate method of financing a vehicle for a lower payment and shorter term. And a lower monthly payment translates directly into more expendable cash for other purposes.