Don't Park That Cash in Your Leased Vehicle

Leasing your next vehicle may be a more attractive option than it has ever been before. I have posted previously about the leasing. Driven by high residual values and low lease (interest) rates, lease payments currently allow you to drive more vehicle for the money than purchasing does.

Leasing also afford the car buyer to avoid a long-term commitment. When you sign a lease, you’re essentially financing the vehicle for a set period of time and when the lease is up, you return the vehicle to the lessor and move on. This can be an attractive option for anyone who isn't interested in keeping a vehicle for the long haul or those who want to trade up for a new model every few years.

I am often asked about down payments on a lease. Most manufacturer-advertised lease payments include a down payment. It is usually in the fine print at the bottom of the television screen and flashes up so fast you cannot read it. It may be at the bottom of the page in print so small you need a microscope to decipher it or speed read at the end of the radio commercial faster than you can listen!

In order to guarantee customers the lowest and most attractive payment possible, these ads include a sizable down payment up front. Typically, this money goes towards paying a portion of the vehicle lease up front. But ponying up all that cash early on doesn't always work in your favor.

While a down payment may lower your lease payment, there is some risk that comes with putting money down to lower your payments. Often this down payment money comes from the equity in the vehicle that you may be trading. While it seems logical to roll this money into the next vehicle, it is not necessarily the best thing to do.

If the leased vehicle is stolen or totaled in an accident during the first few months of the lease, the insurance company would reimburse the leasing company only for the value of the car. They will not reimburse you for the money you put down. Not only would you be short a vehicle but you’d also be out your down payment money.

Paying less up front or even nothing at all may make your monthly payment a little higher but you wouldn't have to worry about coming up short if something were to happen to your leased vehicle. If you have the discipline to do so, you can put your money in an investment account and benefit from it growing rather than spending it to reduce your payments. You always have that money to fall back on in case you have trouble making a payment some month.

Leasing is a very good option for most prospective vehicle buyers. But you must structure the lease in the manner that is most beneficial to your situation. Let me strongly caution against putting money down on your leased vehicle.

Don't Buy the Whole Cow if You Just Want a Glass of Milk!

So you think you know what car you want. Now you have to decide whether to buy the car or lease it. For some, there is no dilemma because they either don't think leasing is right for them or they don't understand leasing. Either of those may be true, but you owe it to yourself to learn more about leasing before eliminating the leasing option.

Used vehicle prices have been very strong for the past eighteen months as I noted here. Manufacturers have used the shortage of late model used cars to their advantage in offering lease payments on relatively short leases (less than 30 months) knowing that the vehicles will come back off lease into a strong used car market. So the residual values (what the car is worth at the end of the lease) are higher which means a lower lease payments.

Here are some factors to consider as you make your next vehicle decision:

Leasing Advantages

• Lower Monthly Payments - because you only pay for the portion of the car or truck that you actually use, your monthly lease payments can be up to 60% lower than for a purchase loan for the same car and same term. You get more car for your money. 
• No (or low) Down Payment - when the lease begins, you'll just have to pay the first month's payment, title, taxes, registration, banking fees, and a security deposit. Some promotional lease deals require a down payment to get to the advertised payment. But because car leases require little or no down payment, your cash is freed up for other things. 
• Warranty throughout Ownership - because the lease term is shorter than a purchase term, your vehicle is likely covered during the entire time you drive it.
• New Vehicle More Often - drive a new vehicle every two to four years, depending on the term length of your lease.
• Lower Tax Bite - you don't pay sales tax on the entire value of a leased vehicle as you would if you purchased. You're only taxed on the portion of the value that you use during your lease.
• No Used-Car Hassles - the headaches of  negotiating a trade value or selling a used car are eliminated. When your lease ends, you simply turn it back to the leasing company and walk away.
• Gap Coverage Included - Most car leases automatically include free "gap" protection in case your vehicle is totaled in an accident or stolen, which pays off your vehicle even if insurance doesn't cover the full loss. Loans do not generally come with automatic gap protection.
• Option to Buy - you have the first option to purchase your leased vehicle at the end of the lease at a price that is determined at the time you lease the vehicle.
• Reduce the Risk of Car Ownership - South Dakota has a damage disclosure law which requires that you disclose any damage to your vehicle exceeding $5,000 at the time you sell it. This typically diminished the value of the car significantly. Some states consider SD Damage Disclosure a "Salvage" brand on the title when the vehicle is titled in their state. If you are leasing the vehicle, though you are responsible for carrying insurance and repairing the vehicle, you are not liable for any diminution of value.

Leasing Disadvantages

• Early Termination Cost - if you must terminate your lease before the end of your contract, the cost is usually very high, much higher than might be expected. However, cost can be minimized by making the right termination choices. But because the leases are so short (under 30 months). Most people end their lease on schedule and do not end early, which avoids all early termination costs.
• Little or No Ownership Equity - because monthly lease payments are so low, you typically do not build ownership or trade-in value in your leased vehicle. It is possible, however, that the market value of a vehicle at lease-end is higher than the purchase option price specified in the lease contract — which means you may have some equity trade value. You could end up with a few thousand dollars of unexpected equity.
• Excessive Mileage Charges - here in the Midwest, we tend to drive more miles annually than people do in other parts of the country. If you exceed the mileage allowance in your lease contract, you will be charged for the extra miles at a specified per-mile rate, usually a reasonable $0.20 per mile. A large mileage excess could result in a hefty charge, even at a reasonable per-mile rate. You can reduce your exposure and build the excess miles into the payment if you "buy" the extra miles you expect to drive at the time of lease signing. You avoid the higher end-of-lease charge this way. But be assured on one thing - you pay for those miles whether you lease or buy. The lease can offer a tidier way to incur those charges.
• Excessive Wear-and-Tear Charges - If you return a leased vehicle at lease-end with excessive dents, scratches, or unrepaired accident damage, you will be charged — because those damages reduce the vehicle's value. Most lease companies clearly specify what is considered "excessive" so that you'll know if you should get it repaired before returning your vehicle. Get the repairs done yourself before you return the vehicle and avoid being charged.
• If you have the option to buy the car at the end of the lease (as is often the case), you'll have to make that decision as soon as the lease ends, whereas if you owned the car you could decide exactly when to sell it.

Leasing isn't the right choice for everyone, but if you can take care of a vehicle properly, and can adhere to the mileage restrictions, it may be the best choice for you!

12/4/2012 UPDATE: Five myths about leasing a car
3/7/2013 UPDATE: Kiplinger: Smart reasons to lease your next car