This is the sixth of nine articles in our Blog Series Is Leasing Really Fleecing?
In our last installment, we showed that one of the major pitfalls of leasing is that leasing usually costs more than buying a car – in some cases, much more. The charges imposed at the end of a lease and the higher finance charges in leases both contribute to the increased cost of leasing.
In addition to the pitfalls that we have discussed in prior articles, there are a few other factors that consumers should consider before deciding to lease their next vehicle
Frequently, leasing promotions offer low monthly payments but relatively high up-front costs. In these deals, the consumer essentially pre-pays a significant portion of the lease. When high initial payments are made in the purchase of a vehicle, the consumer usually has equity in the car. If the car is stolen or totaled in an accident, the consumer will get the difference between the insurance pay-out and the loan amount. But, consumers do not have any equity in a leased car. If the car is stolen or totaled, the insurance company will make payment to the leasing company, and the consumer usually receives nothing. The high up-front payment will have been wasted.
And, speaking of insurance, the cost of insurance on a lease is frequently more expensive than the cost to insure a comparable purchased vehicle. Consumers should check with their insurance company and compare the cost of insuring a leased vehicle with the cost of insuring a purchased vehicle before making a decision to lease.
Other leasing pitfalls are hidden in the fine print of leasing offers that highlight low monthly payments. For example, many lease deals permit annual mileage that is significantly less than typical usage. This is particularly common for leases on luxury and near-luxury models. A typical driver might put 45,000 miles on a vehicle during the course of a 36-month lease. But, if the lease permits only 10,000 a year, or 36,000 miles, the consumer will have over-mileage charges of $2,700 if charged $0.30/mile for the excess miles.
Some lease deals may extend the lease term well beyond the traditional three-year period. Longer least terms force the consumer to keep the car longer, thereby reduing the leasing advantage of always permitting the consumer to drive a newer car. And if the lease continues beyond the date that the warranty expires, then the consumer may be responsible for the cost of mechanical repairs is something goes wrong.
Frequently, lease deals will reduce the monthly payment by artificially inflating the car’s residual value to an amount that is greater than the true expected value at the end of the lease. As we explained in our first article, lease payments are determined in part by the depreciation of the vehicle over the term of the lease. If the value of the vehicle at the end of the lease is made artificially high, then a consumer who wishes to buy the car at the end of the lease will have to pay significantly more than the car’s value. Additionally, the cost of early termination will be much higher.
In our next article, we will discuss perhaps the biggest leasing pitfall of all – the cost of early termination.