Is car leasing for you?

Black Enterprise, April, 2000 by Tanisha Ann Sykes

Decipher the disclosures before you seal the deal

For your next car acquisition, are you tempted to try the more popular, less expensive (or so you think) option of leasing? If so, "be aware that leasing is different from [purchasing a car]," says Carole Reynolds, senior attorney for the division of financial practices at the Federal Trade Commission (FTC). "It may be a good choice for some, but you should consider all costs, including the front-end, during and end-of-lease charges. You may have to pay taxes--i.e., sales, use or personal property--in addition to insurance, maintenance, safety and emissions charges."

Leasing is essentially renting a car over a specified term where the lessee (the consumer) pays the depreciation cost. That's the difference between the residual value (what the car is worth at lease end) and the net capitalized cost (what you pay for the car).

Leasing can be a complicated, arduous process, but with the enforcement of the Consumer Leasing Act of 1991, lessors (the leasing company) are required to spell out everything upfront: costs, terms, fees and conditions. "The way the laws are written today, leasing is still a viable option," says Cedric Rashad, CEO and president of the Rashad Group in Atlanta, whose company wrote, consulted, trained the sales executives and helped develop the lease programs for Lexus and Mercedes Benz. But keep in mind "there are about 30 to 40 ways that a dishonest car dealer could rip off the public through leasing," says Terry O'Loughlin, financial investigator for the attorney general in Fort Lauderdale, Florida, whose office has recovered $5 million to $6 million in restitution for consumers for unfair leasing practices since 1993.

"Disclosures were not initially spelled out because the lease was designed for the high-end executive who was only concerned with the monthly payment and the term," says Rashad. "When leasing became mainstream, it was necessary to refine the policies, and any time the masses get hold of something, there are going to be abuses," he says, referring to the updated Regulation M law, which is enforced by the Consumer Leasing Act. To make sure you're not a victim, follow these guidelines:

* Determine your out-of-pocket expenses. Costs to consider when assessing your lease deal are: upfront, during and end-of-term payouts. The upfront costs include the first month's payment, a refundable security deposit, the negotiated price of the car, taxes, registration, licensing and other fees and charges. The monthly lease payment covers the depreciation fee and the lease charge plus taxes during the course of your agreement. At the end of the lease, you are liable for excessive wear-and-tear and mileage and some other charges. After an average of two to four years, Rashad says you have several leasing options: buy and keep it, buy and resell it at a profit, turn the car in and walk away, upgrade it (turn in a 1998 model and leave with a 2000 model), get a lease extension for up to six months, refinance the balance or release the balance.

* Be prepared to negotiate. Contrary to popular belief, "you can and should negotiate the cost [of a car lease] because it will affect your bottom line figures," says Reynolds.

According to the FTC, almost everything from the net capitalized cost to the acquisition fee, is negotiable. Try bargaining on the upfront charges, the lease term, monthly payments, end-of-lease fees and charges, and a buying option. Also, most leases limit the number of miles you can drive, typically to 12,000 to 15,000 per year. But can you pay or negotiate for more if you know you will exceed the limit. This is really important because it can cost you 10 cents to 25 cents for each mile you go over at lease end. "Most customers should know that the best deals come along every day," says O'Loughlin. "So keep your options open." Once you negotiate a deal you like, take it to other lessors for comparison shopping.

* Make the assessment. "Leasing is not for everyone. However, in today's marketplace, it's designed for the first-and last-time buyer because they have little or no money to put into the car," says Rashad. Compare lease expenses to purchasing costs. If a car is purchased and paid for in full, the consumer pays the purchase price plus taxes, registration, licensing fees and other charges. If, instead of paying in full, the car is financed, the initial outlay would be considerably less, but you'd pay more over the long run in finance charges. "The reason why rich folks lease so often is because they can do more with their money than put it into a car. A car is a depreciating asset, so they put their money into appreciating assets that go up daily," explains Rashad.

* Know your rights. "There is no three-day right of recision whether you buy or lease, except in New Jersey," says O'Loughlin. That means the dealer (except in New Jersey) is not required to take the car back within three days if you reconsider. "If you sign a document that you don't understand, you do so at your own peril." Therefore, before you sign, have the dealer fill out the lease cost information form in Look Before You Lease, an FTC publication (www.ftc.gov/bcp/coline/pubs/alerts/ lease.htm).