Car Lease Basics

Nearly one-third of all new vehicles are leased rather than purchased, up from approximately 19% in 1989. Recent changes to the Consumer Leasing Act are expected to make leasing even more appealing.

Summary of Revisions: The Federal Reserve Board has published final revisions to Regulation M, which implements the Consumer Leasing Act. The new rules became effective Oct. 31, 1996; however, compliance with the changes are optional until Oct. 1, 1997 (because many lessors need to revise their contracts and software programs, and explain the changes to employees). New requirements include:

These changes have been well received by consumer advocate groups and the leasing industry. Standardized disclosure will make leasing a more open process that will likely increase both customer satisfaction and the volume of vehicle leasing.

The Case For Leasing: Leasing is very popular with drivers of more expensive vehicles. Almost 75% of all new luxury cars are leased.

Factors That Contribute to the Popularity of Leasing
Lower Up-Front Costs	Instead of making a significant down payment, up-front leasing costs can be limited to the first month's payment and a security deposit equal to one monthly payment (sometimes waived for repeat customers). Sales tax is assessed on each lease payment, rather than at the beginning of the lease.
Lower Monthly Payments	The lessee is paying only for the use of a car for a specified period; consequently, monthly payments are usually less than those for financing a purchase.
Income Tax Benefits	Depending on the cost of the car, total mileage, and percentage of business use, a lease may yield more favorable tax consequences than a purchase.
Easier to Upgrade	Lower monthly payments allow consumers to leverage their purchasing power and lease a car that is more expensive than they could otherwise purchase.
Less Difficulty in Disposing of the Car	In most cases, the lessee can return the car to the lessor at the end of the lease, or buy it at a preset price.

The Case Against Leasing: A vehicle that is purchased and maintained for the long term will generally be more economical than leasing a car every 2 or 3 years. Some individuals find it hard to break a cycle of leasing because they do not have any equity in their leased vehicle, which makes it more difficult to meet the higher initial costs of a purchase. Other disadvantages of leasing include:

Types of Leases: There are 2 types of leases, open-end and closed-end contracts. Open-end leases usually have lower monthly payments, but require the lessee to guarantee the value of the car at the end of the lease. In the more common closed-end contracts, the lessor assumes the risk of the car's residual value.

Leasing Terms: Do not select a lease solely on the basis of the monthly payment. An informed consumer should be aware of (and negotiate) the following items: (1) capitalized cost (the gross cost of the car, an amount generally below the suggested retail price, plus fees, taxes, etc.), (2) residual value (vehicle's value at the end of the lease term), (3) interest rate, and (4) lease term.

While the new disclosure rules make it easier for consumers to compare leases, it may be difficult to compare the cost of leasing to the cost of a financed purchase. The interest rate assumed in a lease may not be comparable to the rate for a car loan. The financing rate on a lease can be manipulated by decreasing the vehicle's residual value or imposing fees. A thorough analysis requires a comparison of all the above variables.

Your financial advisor can provide more information and should be consulted before any action is taken.

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	Plain-English Car Leases Personal Finance Advisor by OnLine December 23, 1996