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The Truth Behind Leasing A New Vehicle: The Professional's Choice

  
  
  

by Nai Nan Ko Jr., General Manager of Wellesley Toyota: As a professional of the automotive industry, I’ve witnessed too often the trepidation from the word “lease.” No matter whether he is a new customer or an old friend, eyes widen, shoulders rise, and hands are drawn: “No, I don’t want to lease a new car because I want to own my new car” is often the immediate reaction I hear.

lease buyThe immediate reaction is understandable. Yes, when you lease a vehicle, you do not own the vehicle. To best understand a lease, think of it as a long-term rental. You rent a vehicle from a financial institution that the dealership partners with. The financial institution is usually a captive arm of the automotive manufacturer. The role of the dealer is simply to produce a custom rental solution for you.

The real beauty of a lease shines at lease expiration. Upon the expiration of the lease agreement, the lessee has a choice: He can purchase the vehicle or return the vehicle to the lessor. (To better understand leases, please refer to “Understanding How Leases Work”) It is this choice to purchase the vehicle or to return the vehicle that makes leasing a truly unique opportunity.

The truth is: Leasing a new car is neither as risky nor as intimidating as urban legend has it. Rather, changes in the last five years (2007-2012) in our financial market, economy, and automotive industry have made leasing a new car both risk adverse, inexpensive, and in some cases more profitable than financing a new car!

Here's why:

1. Leasing hedges your financial loss in the event of an accident.

A vehicle with known accident history will suffer from accelerated deprecation of up to 15% per year. With the advent of third party vehicle history reports from companies such as Carfax and AutoCheck, the most minor accidents rarely go unnoticed. Therefore, the threat of accelerated depreciation has never been greater than it is today. Unless, you lease.

Screen shot 2012 10 09 at 2.46.48 PM

When you enter into a lease agreement, the lessor is required to buy back your lease at the end of the lease term at a “guaranteed fixed value,” regardless of accident history. The only stipulation is that you have the accident damage repaired to satisfactory standards, which is as simple as calling your insurance agent and bringing your vehicle back to the dealer. Therefore, your total liability in the event of an accident in a leased vehicle is only your insurance deductible. Conversely, if you financed or purchased a new vehicle, you would be liable for not only the deductible, but also the accelerated depreciation.

Of course, there are limits to this assumption. The accelerated depreciation, which again is typically 15% of the vehicle’s current worth, can be less than the insurance deductible. However, there aren’t very many new cars that can be purchased where the insurance deductible is less than 15% of the vehicle’s value. For instance, a $10,000 dollar car will suffer from a $1500 dollar accelerated depreciation in the event of an accident.

2. Lease payments are less expensive than Finance payments.

In September 2012, Toyota of Wellesley offered a Brand New 2012 Toyota Camry SE 4-Cylinder: 

Finance for $750 per month for 36 months with $0 Due at signing.

Or:

Lease for $275 per month for 36 months with $0 Due at signing. 

In this example, the buyer is paying $475 more per month to finance a vehicle than to lease a vehicle. 

Therefore, after 36 months, the cost of vehicle utility comes to:

Finance: $750*36 months = $27,000

Lease: $275*36 months = $9,900

*Leasing saves $17,100 over 36 months of use.

However, you may be asking: “Sure, I agree that I get to keep $17,100 dollars in my pocket, but after 3 years, I won’t have a car to drive.” This is a valid point, so my recommendation is to lease another car for 36 months that is three years younger!

Therefore, after 72 months, the cost of vehicle utility comes to:

Finance: $27,000 + ($0*36 months) = $27,000 (car 1)

Lease: $9,900 + ($275*36 months) = $19,800 (cars 1 & 2)

*Leasing saves $7,200+ over 72 months!

Actually, you’ll save more than $7,200 dollars after 72 months of ownership because of the money saved on vehicle maintenance; maintaining a pair of 3 year old car is cheaper than maintaining a single six year old car. Keep in mind, most major repairs and maintenance expense happen after the 4th year of ownership. And, 80% of all vehicles are traded in for a new vehicle after only five years. 

3. The Lease-End Option can make you money with no downside risk.

The real beauty of a lease is the lease-end option. With a lease, the lessee has two choices at the expiration of his lease.

1) He can return his leased vehicle.

or

2) He can buy his leased vehicle at its guaranteed fixed value, or more commonly referred to as the residual.

In the first option, returning a lease can protect you from accelerated depreciation in the event of an accident. Or, if the lessee is looking for a change in his automotive lifestyle, he can turn in his keys and make a new selection - easy. Typically, there is a disposition fee of $500 dollars depending on the manufacturer. This disposition fee covers the reconditioning, transportation, and resale of the leased vehicle to the wholesale used car market. However, this fee is often waived with the signing of a new lease or when the vehicle is purchased by the lessee.

In the second option, the lessee has the opportunity to purchase his lease at the residual value. The residual value is set at the time of the lease inception. The goal of the leasing company is to accurately forecast the market value in three years, and therefore set, the residual value accordingly. However, the residual value is often always either lower or higher than the market value at lease expiration. Rarely is the residual value equal to the market value. This creates an opportunity for the lessee to make a quick dollar.

Take for instance vehicles leased in 2008 and matured in 2011. The lessees had tremendous equity, upwards of $2000-$3000 dollars between market value and residual value. This is because in 2008, the automotive manufacturers were woeful of a slowing economy and industry bankruptcy. GM, Toyota, et al were selling cars at tremendously low residuals. In 2010, the tsunami in Japan incurred a major supply issue for all manufacturers, which resulted in fewer vehicles manufactured. At the same time, the subsequent increase in demand for vehicles in 2011-2012 compounded the demand/supply issue, and as a result market prices for used cars soared. As a result, lessees had a profit opportunity because their leased cars had market equity.

The converse is not true, and there is no downside risk except for the cost of a disposition fee, which can be waived. If the leased vehicle has negative equity, the lessee simply has to “turn it in.” Take for instance vehicles leased in 2005 and matured in 2008. In 2005, the economy was in good standings. The full effects of the housing crisis had not been realized. Auto manufacturers were confident that leased vehicles would return to the market place in 2008 at forecasted rates. Then, the housing crisis hit. The economy tanked. As a result, the market value of all vehicles in 2008 dropped. At that time, it was best for lessees to simply “return” their cars. And most did.describe the image

4. The Myth: The Bank Owns Your Vehicle

Customers often believe in the myth that they will own their vehicles if they finance it.

This is not entirely true. Whether a customer leases a car or finances a car, the financial lender owns the car. In both instances, the customer is making payments to a financial institution. Until the principle is repaid to the bank, the car is subject to a lien and is the property of the bank. 

5. Manufacturer Perks.

Automotive manufacturers and dealers love the word “retention.” Nearly all manufacturers from Kia to Toyota to Audi and to Porsche have an owner loyalty program. These owner loyalty programs are often lease pull ahead moneys. Specific customers in financial good standing and nearing the end of their lease term will often be notified via mail of an exclusive opportunity to have their last payments forgiven with the lease of a new car. As a result, customers can move forward into a newer car faster. It’s a great perk that I could never say “no” to.

So what’s the flip side? I mean, if it’s too good to be true, then it’s not. Right?

As the professional, I must provide not only the benefits of the lease, but also the disadvantages. There are three reasons why you should be careful leasing a new car. They are: 

1) Mileage constraints

Depending on the make and model, the mileage penalty can range from as low as $0.10 per mile to $0.50 per mile. More expensive mileage penalties are typically found on luxury cars, which are more sensitive to mileage depreciation. If you are driving more than 20,000 miles annually, the mileage penalties may quickly exceed your comfort level. In which case, it may no longer be economical to lease. 

However, keep in mind that excessive mileage will depreciate your car whether you finance or lease. And, if you find yourself going over your mileage limit and need an easy exit, the mileage penalty will be waved if you purchase the car at the end of the lease.* So a good strategy to avoid paying your mileage penalty is to purchase your leased vehicle, refinance it, and continue driving it. The dealer can help you refinance your purchased leased vehicle. 

2) Damage constraints

In the event that you choose not to repair your vehicle, the lessor will bill you for the excessive damage. The definition of excessive damage varies from manufacturer to manufacturer. However, I have found in my experience that the manufacturers are very reasonable with vehicle damage in an effort to maintain a high level of customer satisfaction. Only in instances of negligent abuse have I seen a manufacturer stick its ground. If you’re concerned about discerning the line between normal wear and tear and excessive damage, purchase an Excessive Wear & Tear Insurance policy. It is very reasonably priced, and I would recommend it. 

However, if for some reason you decide not to go through your insurance to pay for the excessive damage, the lessor will often wave the excessive damage penalties if you purchase the car at the end of the lease.* 

3) Time constraints

In the event that you wish to terminate your lease early, the lessor will impose heavy fines. There are manufacturers such as BMW & Mercedes who will allow you to transfer your lease to another individual who will finish making payments on your behalf. However, this is few and far between. I recommend that if you are going to enter into a lease, please make sure you can commit to the full term of your lease. 

Thanks for reading my blog on the benefits of leasing over financing. Of course, the cheapest cost of automotive ownership is to hold on to your car for 20 years – forever! However, with rapidly advancing technologies and increasing gasoline costs, do you want to? Personally as an automotive enthusiast, I have found both practical and emotional arguments to buy a new car every three years. For me, the excitement of buying a new car is one of life’s greatest pleasures!

*All efforts to ensure accuracy are made. Please check your dealer for details.


Comments

The most important point is to always calculate what an option costs and to make sure you have enough money to finance it. 
There's nothing more expensive than having not enough money. 
Leasing ohne Bank and Leasing mit Betreibung are good possibilities for financing as well. 
Leasing ohne Bank  
Posted @ Monday, May 27, 2013 3:21 PM by Leasing mit Betreibung
Now that explains everything. I am so glad to know that.
Posted @ Thursday, August 15, 2013 1:30 PM by Cable Assembly
Having a vehicle means convenience and less hassle traveling but there are also some setbacks for having one.  
Incredibly a great page you've shared in here indeed. thanks a lot for the share.
Posted @ Wednesday, August 21, 2013 3:40 AM by Ryan @ car insurance
Thanks for sharing the idea there would be some apprehensions from segment but i am up for it. 
Posted @ Tuesday, October 08, 2013 6:28 AM by Boat rollers
In point No. 2, you left out a key detail about the cost of leasing vs. buying. 
 
Six years after buying a Camry, you will own a car that is worth roughly $10,000 as a trade-in. I base that on NADA Guides' value for a 2007 Camry SE (one year older) 4-cylinder with 75,000 miles. 
NADA says the clean trade-in value is $10,350 and the average trade-in value is $9,450. 
Conceivably, an owner could trade in that Camry, and the value would be enough to cover a 3-year lease on a new Camry (using your example). In other words, a new car for three years for nothing extra. 
Using your example again, leasing a third Camry would cost another $9,900. Buying a car instead after two leases would add even more cost. 
Posted @ Friday, November 01, 2013 8:17 AM by Rick Popely
Good morning Rick,  
 
In follow up to your comment above, a six year old Camry will have value. I agree. Yet, using my example above and assuming the average trade-in value is $9,450 (as you stated), at time year 6, the lease will have saved you $7,200. Therefore, your net is $2250 in favor of owning. However, keep in mind that for two leases, both with complimentary ToyotaCare maintenance, the $2250 net equity will evaporate in costs spent on maintaining the vehicle (Tires, oil changes, 60k service, etc). Furthermore, based on NADA studies, 80% of all vehicles purchased new are traded in before year 5. For the minority of those who decide to keep their cars beyond 6 years, an argument can be made that the cost in depreciation from year 6 to year 9 would cost the same as leasing a new Toyota Camry. For instance, what does NADA say a 9-year old Camry with 112,500 is worth? I would argue closer $2000 as a trade in value, at which point you'll be replacing timing belts, engine gaskets, etc. - Major work. Lastly, what about the intangible cost of breaking down on the side of the road? Although Toyota has a great reputation for reliability, a 100,000+ mile car has a higher risk of failure (for instance dying alternator, battery). Personally, the safer choice is to lease. 
 
I appreciate your feedback. Please keep the comments coming as an open, honest discussion will help everyone.  
 
*Note: If not a Toyota Camry with a high resale value and low maintenance costs, a leasing option would make even more sense for expensive luxury brands.
Posted @ Friday, November 01, 2013 8:38 AM by Nai Ko Jr
Nai, 
The NADA Guides says the trade-in value of a 2004 Camry SE is $5,575 in average condition and $4,600 in rough condition. 
The main point is that when you buy a car you have equity that can be the down payment on your next car. With a lease, you have none and start over every three years. In the long run, leasing is more expensive. 
The benefits of leasing are that you have a newer car more often, it's under warranty, it has more current technology and you won't face major repair expenses. 
However, that doesn't mean leasing will save you money -- and certainly not $7,200 over six years, as you asserted. That is a false promise at best and a gross exaggeration. 
Owning a car for six or more years is a gamble on repair costs, but with a car like the Camry, it's one of the safest bets you can make. That's why so many people buy them. 
Posted @ Friday, November 01, 2013 9:52 AM by Rick Popely
Rick, 
 
I respectfully disagree. In the end, it's a choice of risk management and cash flow.  
 
Knowing the expense and complexity of our newest generation of vehicles, I would be surprised if you were able to recover in 9 years the equity from repair bills.  
 
Sincerely, 
 
Nai
Posted @ Friday, November 01, 2013 11:08 AM by Nai Ko
Leasing a new vehicle is really very nice experience for anyone. It certainly the use of a new vehicle for certain period of time. It is something which give the great experience using vehicle and also grading its performances time and again.
Posted @ Monday, December 02, 2013 8:29 AM by Ricky Anderson
Leasing a new vehicle is definitely a good choice and also a very nice experience. This is definitely different from buying a vehicle, but it is equal to that in terms of the user ownership for certain period of time.
Posted @ Monday, January 13, 2014 8:34 AM by Foster
If you can own your vehicle of course that would be much better. If you're going to lease it, it's important to have a stable kind of job where you know you will be able to finance it on a monthly basis because it's a long term commitment.
Posted @ Tuesday, January 21, 2014 1:14 PM by Pre Purchase Vehicle Inspection
We take any property for lease that doesn't mean that we owned that property completely. Lease means to have some property or products for a particular time period. Here we have found the truth behind the concept of lease and it is applicable in case of getting vehicles.
Posted @ Monday, February 10, 2014 2:00 AM by Robert Pattrick
Most often the word lease really hurts a little ego of a person who have severe attitude. No doubt this will be going personally; but basically we should avoid lease instead of owned by ourselves. But due to financial imbalance most of the people were start taking lease instead of own a vehicle. The above article describes the complete fundamentals about lease; in my point of view it is quite essential to own a property instead of go for leasing.
Posted @ Monday, February 17, 2014 8:11 AM by Alan Marlins
I must say that overall I am really impressed with this blog.It is easy to see that you are impassioned about your writing. 
Posted @ Thursday, February 20, 2014 2:49 AM by vipin
This is a question I have thought about for a long time now. I have always bought a new vehicle but leasing is sounding like a better and better option for me at this stage of my life. 
Thx for sharing your insight.
Posted @ Thursday, March 06, 2014 3:44 PM by Laura W.
I did purchase my car at the end of my lease with Volkswagen and had to pay for the additional miles first.  
That fee was not waived as you stated.
Posted @ Monday, March 10, 2014 10:57 PM by Dee
Thank you Dee for sharing. I was unaware that VW requires you to pay for excess miles, which doesn't make any sense to me, in a closed lease with a guaranteed fix residual. If you think about it, why should you pay for excess mileage penalties when you're accepting to buy the car at the residual value, which assumes the car's value is a specific amount on the basis of lower mileage? By agreeing to pay the residual and mileage penalty, you're essentially buying a car valued at X miles (say 36,000 miles), but has X+Y miles (say 40,000 miles). That is wrong of VW. I can say with certainty that Toyota does not ask you to pay for your miles when you agree to buy your car at the end of the lease at the residual value.
Posted @ Tuesday, March 11, 2014 4:09 AM by Nai
I have a leased Hyundai auto. 
I have been in an accident and 
will repair auto under my insurance. Am I obligated to  
let Hyundai know, as it is leased? 
Thank you
Posted @ Saturday, March 15, 2014 10:02 PM by Elaine
Hi Elaine, 
 
No, you're not obligated to let Hyundai know,. But you are responsible for making sure it is repair to manufacture standard, which your insurance company will assist you with. 
 
Hope this is helpful, 
 
Nai
Posted @ Sunday, March 16, 2014 3:45 PM by Nai
In this world different peoples are living,starting from rich to poor. Everybody has a desire to own a car but in that case money matters a lot. So, that many of peoples are go for lease vehicle instead of own a new one. The demerit of lease a car is what ever the maintenance cost of the car, should be paid by the person who buys the lease car and he will take all the risk regarding any type accident happen with that car. And after a period of time the person must be return the vehicle to the real owner with required amount of money. So, in my point of view it is good to have a brand new car instead of a lease car.
Posted @ Friday, March 28, 2014 12:33 AM by Luis Martin
The professional people like to travel in car because it suits to their personality. They prefers to go for the rental car or some of them prefers the own car for which they need to lease the new car. Before leasing you should decide the model and brand of car that helps you to take look towards the money. If you would have the proper amount of money then you can take a better car otherwise you may take loan also. In the mean time you should have the proper knowledge regarding the service station which should be appropriate for your car.
Posted @ Wednesday, April 02, 2014 2:21 AM by Babylon Smith
i'm glad to meet your site.. 
it was amazing..
Posted @ Wednesday, April 09, 2014 3:53 AM by Obat Angin Duduk
I believe it is important to review the details you explained above: Your example above shows that the finance/lease financial rates were from 2012 (you noted that leasing has changed over the past 5 years-which is true). And, as of now the lease rates are pretty good (Camry/Corolla). Therefore, my first point is to understand current rates/residuals in your region. Each manufacturer offers will vary and you must look at ALL the numbers. For instance, some manufacturers will offer higher cash back, but lower residuals-can't forget the money factor and the agreed upon purchase price! Corolla residuals were 48% in 2012. As of Septemeber 13' TFS was banking on the New Corolla S to be in the range of 65%-68%. Experts stated that Toyota could have huge potential losses in 3yrs if they did not retain their value as expected. Seems that TFS was a did have high hopes, as I locked in a 3yr/36k mile lease for 62%. Anyways (getting off track), the point I want to make is for the consumer to realize the costs that come with a lease. Leases have a premium of $650 for a "Lease Acquisition Fee". In addition, my county assesses a 10% Tax on the vehicle. Take a Corolla S+ Base lease at $200 for 2 years ---> Now becomes $247. Also, Toyota is the only manufacturer that does not build in GAAP with their leases (additional cost). Moreover, you decided to lease the vehicle because of the risk of depreciation/new CVT transmission but strongly considering to buy the vehicle at lease end (Which is understandable). For example, the agreed upon residual value is $13,000 ---> That $13,000 has to be taxed AGAIN (with more fees)- only in states were vehicles are taxed. I don't want to keep rambling in this small txt box, but wanted to apply this thinking to help consumers decide what they really want and can possibly save thousands by making the decision for them. In the end, one cannot say that leasing is always the best option - Toyota's should have some type of value after 6 years when purchasing.
Posted @ Wednesday, April 09, 2014 10:17 PM by Corolla S+
Most states only tax on the depreciation part of the vehicle.  
 
Sometimes buying out at lease end makes sense. For example, assuming 58% residual, new Honda Pilot EXL with a msrp of $37,600 has a residual of $21,808. But for a 3 year old Pilot EXL, it'd be hard to find one for less than $26,000. 
 
I'd compare lease vs buy the apple to apple way. 
 
To buy:  
you take out a 6 year loan with no money down and exactly the same monthly payment as the lease, plus a balloon payment at the end.  
 
To lease: 
at the end of the lease, if your car is worth more than the residual, you buy out and refinance the car for another 3 years with the same monthly payment and a balloon payment. at the end of 6 year, your total payment would be almost identical to the 6 year loan. and the balloon payment also the same. 
 
But if the market price for yoru car is significantly less than the residual, return the lease and buy a three year old used one at cheaper price and pocket the difference. 
 
So lease always gives you more options. 
 
Posted @ Thursday, April 10, 2014 10:49 PM by honda pilot
Nice info broo.. 
i like hyundai :-)
Posted @ Thursday, April 24, 2014 3:30 AM by Obat Herbal Infeksi Lambung
Buying a car is a difficult task. We need to know all the details of the car we want to buy and finalize the price of the car, i.e we have to search for the cheapest dealer of the car. Buying a car on lease is a good choice if you have a crisis of money. 
BMW Mechanic Spring, TX
Posted @ Saturday, April 26, 2014 1:02 AM by Rochelle
Excellence article that show me about the way to leasing a new vehicle.Thank for this post i really love it so much.
Posted @ Monday, May 05, 2014 9:02 PM by Thomason
Different people have different kinds of choices. Mostly in case of purchasing a car people follows so many criteria before that because it helps them to choose the best car. Some people are also present here those who loves to lease a car that is a new one because it helps to get a new car in less price along with a good running condition.
Posted @ Tuesday, May 06, 2014 2:57 AM by Garcia
In most of the occasion people were start taking vehicle in lease or rent. Most probably it is one of the suitable solutions for their transportation system; no doubt it is quite tough to own a vehicle as the cost is very high. Therefore we have found the new concept of leasing vehicles. Lease system is quite cheap than vehicle payments; so it is quite possible to adopt the concept of leasing vehicles.
Posted @ Monday, May 12, 2014 4:30 AM by Grant Miller
If you can buy it and if you can't afford wait don't go for leasing until and unless you don't have any other option. The worst thing is that in case you be unable to pay the amount to the one from whom you have got the car on lease. 
BMW Repair San Jose
Posted @ Friday, May 30, 2014 5:12 AM by Mark Henry
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