Leasing a Car

Advantages and pitfalls of leasing.

With automobile prices rising and interest paid on consumer loans no longer deductible from your federal income tax, more and more consumers are turning to leasing their automobiles rather than purchasing them.

Most automobile dealerships offer today what is known as a "closed end" or "walk?away" lease. Under this kind of agreement, you agree to lease your automobile for a specified period of time with a maximum amount of mileage permitted. At the end of the lease, you have the option of purchasing the car or returning it to the dealer. Your lease payment is based upon the company's prediction of the value of the automobile at the end of the lease period. If the automobile is damaged beyond ordinary wear and tear while in your possession, or if you exceed the specified number of miles, additional charges will be collected from you at the end of the lease.

If you decide to lease a car, be sure that your lease agreement specifies whether you or the company will be responsible for regular maintenance and repairs. Although most leases require very little upfront money, some dealers now want several thousand dollars as a "capital reduction" fee at the outset of the lease. In essence, this is the dealer's way of keeping monthly payments attractive, and a low monthly payment is what attracts many consumers to leasing in the first place. But let's look at what a large capital reduction fee does to that payment.

Suppose a dealer advertises a $250 lease payment for 48 months on a car with a sticker price of $17,000. If there's no capital reduction payment due at the beginning of the lease, you can drive the car for four years for $12,000. But suppose the dealer also wants a capital reduction payment of $2,000. Now you're spending $14,000 for the same four year period, which translates into a monthly payment of over $291. And if you want to buy the car at the end of the lease, you will end up paying thousands of additional dollars to do so, dollars you may have to finance at a relatively high cost, since lenders charge higher interest rates on older cars.

Just a few years ago, most leases allowed you to drive as many as 15,000 miles per year without incurring additional charges. Today, most advertised leases allow you only 12,000 miles per year for the life of the lease, with charges of 20 cents per mile for each additional mile. So if you have a four year lease that allows you to drive a total of 48,000 miles and you actually drive 60,000 miles, you can end up owing an additional $2,400 when your lease is up. You can negotiate a higher mileage allowance, but you can expect to make a higher monthly payment if you do so.

Finally, you should also keep in mind that you are not the owner of an automobile you lease. As a result, lemon law protection which state laws provide to car purchasers may not be available to you.