Thursday, June 26, 2008

"Should I Buy or Lease?"

When I sold cars the manufactuer I worked for was really pushing us to sell three year leases, and sent many different executives to train us how to do so. At first they failed miserably. While the lease itself was a good deal, there was a factor that could not be overcome in most cases.
In the late 90's leasing was all the rage. The idea was that by leasing a vehicle you could lower your payment to ridiculous amounts. It was good for the manufactuer because when a customer brought a car back after three years they had a chance to earn your bussiness again. Then the non-manufactuer banks got into leasing and that is when the trouble started.
Leasing was designed to not go over 4 years, and how it worked was like this. Say after 4 years you want to turn your vehicle back into the bank. The value of the vehicles were predetermined at the time of signing. This was called the lease end value. This value was taken off the price of the car and you just made payments on the difference. When the mainstream banks got in on the action, they decided to take leases out as long as 72 months. This made fro a ridiculously low payment for the customer, but the problem was that people usually don't keep their car for 72 months. So when they went to trade the car in after a few years, the payoff was remaining payments + the lease end value. This caused the customer to be in a very bad equity position, so most of the time they could not trade, effectivly taking them out of the market.
When the banks lost millions of dollars due to inflated lease end values, most of them got out of the leasing bussiness. That is when the manufactuer's banks decided to give leasing another go and do it right this time. The problem is by this time most of the customers had either had a bad experience with leasing or heard horror stories from someone who did. So when a lease would brought up to them, they clammed up and said "don't talk to me about a lease." Not wanting to lose a sale, the salesmen complied.
So now that the leasing problem has been fixed, and you think it might be beneficial to you, take with you these tips.

1. Be prepared with some money down. This will help with initial fees such as taxes and first payment.

2. BE prepared to keep the vehicle the length of the lease. If you don't you are going to be in a very bad equity situation.

3. Do not lease if you put more than 15k miles per year on the vehicle. Manufactuers charge anywhere for 10 to 15 cents per mile over the pre-set limit at the time of return.

4. Do not lease if you plan on keeping the vehicle over 5 years. Yes you have an option to buy at the end of the lease, but doing this can be the same as taking out an 8 year lone on the vehicle.

That is not all there is to know about leasing, but it gives you a good start. If you have any questions post them here and I will do my best to answer them.


lgraham said...

Is there a legal way to sub-lease a car - to an obvious reliable second party and then how would insurance be handled?

Thanks in advance

Ed said...

If you own the car free and clear, I would see a lawyer and have him draw up a contract and go over the ends and outs. If you trust the second party to carry insurance on the vehicle, it should be fine, but if they don't you might be out a car if they wreck it.

If you are a private owner and are financing the vehicle from a bank, the law in most states says you have to carry insurance on it. Also, the financial institution you are purchasing the vehicle from might not be happy about you leasing it out without their knowledge. The call this a "straw purchase", which means someone financing a vehicle for somene who is not on the paperwork. I have seen fincance companies repo a car over this.
(Disclaimer- I am not a lawyer or a bank representative and they might be best suited to answer this question.)