Leasing is a way that consumers can drive a new car or truck off the lot without actually having to purchase it. What consumers often fail to recognize when entering into leasing agreements is that they are basically signing a long term rental contract. American consumer advocate Ralph Nader says that "consumers are getting gouged far too often. It’s more like auto fleecing than leasing." What happened to Mario and Avery takes place often as people sign long term leases and then get divorced, lose their jobs, their eyesight or their lives and still car companies refuse to break the leasing contracts. Consumers must realize that when they sign a contract to lease for three years, it’s for three years regardless of what happens in their life. Before leasing, it’s also important to do some basic math to realize that long term leasing is far more expensive than buying a vehicle outright.

Car companies have spent a lot of time advertising leasing as a low-cost alternative for those who want that new car smell, but don’t have the finances to purchase. It’s true that leasing is a way to get into a new car with lower monthly payments than what loan payments would be on the same vehicle. However, when consumers factor in along with their monthly payments, a down payment, interest, additional fees and taxes, it becomes clear that leasing is extremely profitable for car dealers. There are some benefits to leasing and consumers can negotiate to get a better deal, but everyone should weigh the pros and cons before signing a leasing contract.

The least expensive way to acquire a new car is to pay cash for it. Since most of us can’t afford to do that, we can take out a loan for a used car, or lease, or borrow money for a new one. Some consumers prefer leasing because they don’t mind having perpetual monthly payments as long as it allows them to drive a new car that is under warranty. A motorist who leases can avoid tying up a lot of money in a vehicle and if they have a business, they can write off the leasing payments. At the end of the lease you can decide to buy the vehicle or simply turn it over to the leasing company.

The pitfalls? When you lease a vehicle, you don’t own it and never build up equity in it as you would if you had bought the same vehicle. Leasing can be expensive if you decide to keep a car, truck or van for a long period of time. If you miscalculate the number of kilometers you plan to drive, leasing can be costly as well. Even though you don’t own the leased vehicle, you are still responsible for maintaining and repairing it. Many of the repairs will be covered under warranty if you are leasing a newer vehicle, but if you are leasing an older one this can become expensive.

There are two kinds of leases: closed and open. In a closed lease, the most popular kind used in the marketplace, there are a set number of payments to be made during a specific time period. After you have fulfilled your obligation, the vehicle is returned to the leasing company and you have an option to purchase it at the previously-agreed-to buyout price. At this time, you may have to make additional payments if there is excess wear and tear on the vehicle and if you have driven a higher number of kilometres than what you were allotted.

In an open end lease, you also make a set number of payments over a predetermined time frame. When the vehicle is returned, you may have to make an additional payment to cover the difference between the actual value of the vehicle and its residual value. For example, if the vehicle had a residual value of $11,000 but the leasing company could sell it for only $9,500, you would have to pay an additional fee of $1,500. If the vehicle could be sold for more than the residual value, the consumer should be refunded the difference.

While lower monthly payments may seem attractive, keep in mind there are additional costs involved when leasing a car. Most leasing companies require a down payment of thousands of dollars. This "down payment" does not build up equity in the vehicle at all but is merely a payment in advance to make the monthly lease payments appear smaller. You may have to pay a security deposit, licence and registration fees, acquisition fees (paperwork charges), Gap protection insurance (see Alert 24 on Gap insurance - it may be cheaper through your own insurance company than the dealer!).You may not be allowed to remove your vehicle from the province or territory where you leased it for an extended period unless you have permission from the leasing company. You may also want to take out life and disability insurance on the lease in case something happens and you can’t honour the contract.

Give your full attention to the excess kilometre charge. A lease may allow for 20,000 km to be driven annually for a total of 60,000 km over three years. If a consumer racks up 78,000 km during this period, this will translate into an excess kilometre penalty, or overage charge, at the end of the lease. For example, if there is a 12 cents a kilometre overage charge it will mean the 18,000 excess kilometres will be multiplied by 12 cents for an additional payment of $2,160! Excess wear and tear charges could
also be levied against you. This could include balding or mismatched tires, damage to the car’s exterior, missing parts or rips or scratches to the car’s interior. Don’t get railroaded into being told there is excess wear and tear on your car if you feel there isn’t. Remember your security deposit and try to use it as your last months payment.

When you sign a lease, under no circumstances are you allowed to walk away from the contract. Most leasing arrangements with car companies are iron clad and make it clear that you will not be allowed to end your lease early unless it is stated in your lease. If you are able to negotiate a right to early termination into your lease, it should contain the formula for calculating the early termination amount. It should also be noted that someone buying a car may try to negotiate the selling price down from $25,000 to $22,000. However, someone leasing this same car usually does not take part in this kind of haggling so they will end up making leasing payments based on the $25,000 selling price.

If you lease a vehicle and need to get out of the contract, be aware that you may have to try and sublease your vehicle to someone else. While a dealer could help you do this, chances are they would rather try to lease another vehicle to another customer rather than help you. If you want out of your lease, you may also have to purchase the vehicle at a buyout price set by the leasing company or make the monthly payments until you have fulfilled your obligation. Avoid leases that are longer than the manufacturer’s warranty. Some dealers may try to get you to sign a 39-month lease rather than 36 to make the payments seem lower. However, if the warrantee is up, you could be required to make repairs to the vehicle just prior to having to give it back.

Avoid leasing after December 31st as you will then be leasing a car that will be half a model year old. Cars depreciate quickly, so it’s best if you to strike a leasing deal when new models come out which is usually between September and December. Shop around to see if the car you want can be leased elsewhere cheaper. Do the math on purchasing the car through a lender to see if buying the car would make better sense. Ask yourself if you would be better off financially to purchase a car that is two years old rather than lease a new one? Don’t lease unless you are fairly secure in your job and life situation, as three years is a long time. Could you have children and then need a minivan instead of a sports car? Never sign an agreement you don’t fully understand. Do the math - you may find in some cases that you will pay less in loan interest at a bank than what you will pay in finance charges to a leasing company.

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