The attraction of an auto lease arrangement is that it typically requires little cash up front (the cap cost reduction fee can usually be satisfied with your trade in and/or the rebate program de jour), and the low payments for the initial 24 to 36 months of the lease. In fact for a person who likes to trade for a new car every two or three years, the arrangement seems made to order. And if all that matters is the monthly payment then that may be true–within limits.
So, what’s so bad about leasing?
You owe something, but you own nothing. One of the central problems with auto leases is that they put you into a perpetual state of zero or negative equity in your car. Though the lease is secured by the car you’re driving, you have no collateral to back up the loan because you don’t own the vehicle securing the lien on it. The dealer has both your note and ownership of the car!
You and the dealer can call the payment plan a “lease” all you want, but it will show up on your credit report as a payment arrangement with a monthly payment, specific term and balance, and that’s exactly how the leasing company will carry it on their books. All of which looks curiously similar to a traditional loan, and this has meaning.
Limited future options. Unlike leasing a house or apartment for which you pay an agreed upon monthly fee, car leases are set up like loans, meaning you’re on the hook for the full remaining balance of the lease at any point in the term. Most will allow you to get out ahead of schedule, but you will be subject to penalties that can be stiff, especially in the early going.
Once you’re in a lease, there’s virtually no way to get out without incurring a battery of fees established for the primary purpose of keeping you in the deal until the very end, when still more fees may apply. All of this spells limited options, and with the ever changing nature of life, can any of us afford to lock ourselves into a financial arrangement that offers so little flexibility?
Fuzzy provisions that favor the dealer. Leases also come with mileage limits, which if exceeded will be assessed a per mile charge, as well as maintenance fees if the car is deemed to be in a condition which is in excess of what would be considered normal wear and tear. This type of verbiage is suspect since a word like “normal” is totally subjective. We may consider dings and dents to be normal wear and tear, but the dealer may see it differently. And keep in mind, it’s the dealers attorney–never ours–who prepares the lease contract.
On entering a lease, we can base our cost expectation on recent driving history, but what if that pattern changes at some point during the lease term? What if, for example, you leave an office job with a 20 mile per day round trip commute for a sales job requiring you to drive over 100 miles per day?
In such a situation, there’s no way to know for sure what the ultimate cost of the car lease will be, since you’re now in a situation of open ended variables.
Negative equity on purchase conversion. There’s usually a price at which you can convert the lease to an outright purchase, but the cost of the buyout will almost certainly be higher than the underlying value of the vehicle. Should you decide to buy out the lease, you will have spent the lease term itself owning nothing, and the first few years of the purchase loan term being upside down, with a higher loan balance than the vehicle is worth.
The low down payment and the low monthly payments that feel so right when the deal is initiated, convert to a bunch of hard to understand gotcha provisons, all working in favor of the dealer.
Nothing to sell or trade for the down payment on your next car. This is probably the most damning provision of car leases. Once you’ve completed the original lease, you won’t have any trade-in for a purchase or new lease, plus there will be termination fees and possibly mileage and maintenance charges as well. Not only will you have no money for a down payment on your next car coming from the current one, but you’ll most likely have to write a check just to get yourself out of the original deal.
In this way, a lease keeps you from ever getting ahead on your automobile asset; you will most likely go into your next deal from a position of weakness, forced to rely on the mercy of your original dealer, or of another dealer, to structure the arrangment on your next car in some way that’s affordable for you.
Complexity. This isn’t really a financial issue, but if simplifying your life is a goal at any level, leasing a car won’t help with that pursuit. Buying a car is pretty simple. Leasing is a voluntary plunge into complexity. When you enter a lease with a dealer, you’re accepting dozens of terms that you may only partially understand, and guarantying that you’ll be dealing with your dealer at some point in the future under less favorable circumstances.
You will, for example, always have to worry about exceeding your mileage limits, maintaining the car in perfect condition and facing the prospect of an uncertain cost on the back end of the lease. None of that is conducive to simplicity, to establishing future plans, or even toward getting a good nights sleep.
With leasing, all the good news is on the front of the deal, but the back is where things get ugly. The strongest argument against leasing is that your options outside of the lease are very limited and you will be trusting a significant portion of your future budget to the leasing company.
If cost is the reason for leasing, it will usually be better to either buy a good, late model used car, or a lower priced new car. Either way, once the car is paid off, you’ll have something to sell or trade for a down payment on the next car. And just as important–no gotcha provisions!
Have you ever leased a car? Did you feel that you somehow “came out on top” in the deal? Or was it one of those situations you wish you’d never gotten into?