Behind The Wheel

Types Of Leases

There are two types of leases: closed and open. A closed-end lease allows you to walk away free and clear at the end of the lease after handing the keys back to the dealer. Of course, you must pay for any damage the car may have incurred, and you'll have no vehicle to trade in should you decide to purchase rather than lease next time around.

An open-end lease means you own the car at the end of the lease. This type of lease is rarely recommended because you have to pay the vehicle's appraised value, called the residual value and set by the dealer, before you take possession.

Dealers prefer closed-end leases because they bring customers back over and over again since at the end of the lease, the lease is often simply rolled forward to cover a new vehicle. Some dealers will sweeten the deal if they think you'll become a long-term leasing customer. Buick's GMAC SmartLease program, for instance, may waive the security deposit and first month's payment for return customers.

It is true that leasing payments are generally lower than financing payments because you pay only for part of the depreciation of the vehicle during the time you lease it rather than for the price of the entire vehicle. However, at the end of, say, a two-year lease, the car could still be worth several thousand dollars, which means the dealer ends up with both your payments and a highly resaleable 2-year-old vehicle.

"Leasing payments are often substantially lower than loan payments," says Harold Allen of the Ford Motor Co. "Our Red Carpet Lease programs have some one-price programs whereby the lessee saves $2,000 on the price of the car." (The Ford programs refer to specific equipment and options on Ford's Thunderbird and Escort models.)

In addition to lower monthly payments, some dealers are attracting buyers with smaller or no down payments. To lease a Lexus ES model, for example, you merely need a $999 down payment for a 36-month lease at $399 per month. And GMAC offers a 24-month lease for under $400 a month with $1,000 down.

There's even a growing market for leasing used vehicles, with warranties that cover the full term of the lease. Many of these secondary market cars are 2-year-old luxury cars still in their prime and coming off first-time leases-some with fewer than 25,000 miles on the odometer. Because leased vehicles are generally well-maintained and under three-year warranties, these cars and trucks are often a very good deal.

Helping to stretch the small-business owner's budget even further is a slackening of mileage caps. Many new leases now double the number of free miles you are allowed to drive without incurring an average 15-cents-per-mile penalty over the limit. From a cap of 15,000 last year, several lease programs now allow at least double that amount, and even higher if you are a keen negotiator.

All this seems to make leasing an easy, hassle-free way to put brand-new vehicles in your hands, particularly if you can't qualify for a regular car loan. (Many lenders see leasing as less risky.) However, there are pros and cons to every decision, and lease contracts vary among dealers.

Many buyers don't realize it, but you can negotiate the price of a vehicle you lease just as you can with a vehicle you purchase. The same rules apply. You are not obliged to inform the salesperson of your intention to lease until the car's price has been agreed on, including any rebates. Then you can work out the lease.

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This article was originally published in the January 1996 print edition of Entrepreneur with the headline: Behind The Wheel.

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