Behind The Wheel
If you've been busy scouting out the best buys in new vehicles, you may be concentrating your efforts on choosing the model, make and options to fit your needs. But eventually, the question of financing arises. Should you buy or lease?
The popularity of leasing continues to rise. In fact, by the end of the decade, manufacturers expect half of all new cars to be financed under a leasing program, whether it's for a single car or an entire fleet.
When you lease a vehicle, you sign a contract with the lessor that gives you the right to use the vehicle during a specified time period for an agreed-upon payment. You do not own title to the car, but you are responsible for fees such as insurance, licensing and registration.
Paying cash for a car will always net you the best price because you won't be paying interest on a loan, but is that the best way to use your available capital? When you consider that the greatest benefit of leasing for the self-employed is the tax deduction for leasing payment interest, you'll probably think twice about tying up your savings or stretching your credit line to purchase a vehicle.
Recognizing our desire for new cars and the difficulty in paying for them, car companies are crunching numbers and coming up with innovative pricing to appeal to buyers. Dealers are more willing than ever to custom-tailor leasing programs and are offering more incentives. For instance, Cadillac's SmartLease program on its DeVille model is $50 less a month in payments than it was two years ago. And if you already own a Caddy, you can take $1,000 off the $2,800 down payment.
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.
Pros And Cons
Leasing is a good option for you if:
- You plan to use the car or fleet for business purposes. Interest on lease payments is deductible.
- You like to drive brand-new models every two years. It's easy to roll over a lease from one new car to another.
- You'd rather keep your capital in the bank.
- You and your employees can live within the lease's mileage restrictions. Calculate the average mileage you and your employees drive on business each year, and negotiate a cap. Although some lessors are extending their limits, make sure you read the fine print for the exact figure.
- You prefer to drive a luxury car but have an economy budget. High-end vans, light trucks, sport cars and exotics can be within your grasp with no-down-payment leases.
- You need to make a statement for image purposes. Like it or not, we are judged by the cars we drive; the more expensive-looking the car, the more success we are perceived to have achieved.
- Arguments against leasing? Here are a few points to consider:
- Don't lease if you want to own the car at the end of the term. In addition to the payments you've already paid, you'll be charged the residual value before you can take possession of the vehicle.
- Don't lease if vehicles take a beating in your line of business. Wear-and-tear charges can cripple your budget when you turn the cars in.
- Don't lease if you plan to keep the car for more than four years; otherwise, you'll be paying for the same vehicle twice.
- Don't lease if you are not sure you can make the monthly payments. Terminating a lease early usually means being liable for the difference between the value of the car and the amount you've already paid. Ask what the penalties are before you sign.
- Don't sign a lease until you've talked to a finance company about insurance. If you damage the car, your own insurer may only pay its current cash value, and the lessor may expect you to pay the penalty for early termination. It's typical for the finance company to provide "gap protection" for free and pay the dealer the difference you owe. In addition, the dealer may require you to carry higher insurance.
- Don't lease if you plan to keep the car longer than the life of its warranty. You'll be responsible for repairs after the warranty runs out.
Fleet leasing is a whole other ballgame. There are many more variables to consider, such as the size of the fleet you need and the types of vehicles you want. What about their resale value? Do you have a large enough budget? Who will maintain, service and manage the fleet? Should you finance the fleet through the dealer, your bank or another financial institution? Before you make any decisions, run your list of questions by your accountant and the professional fleet expert at the dealership.
Retail leases are for individual personal-use vehicles; fleets are leased under commercial leases that are specifically geared for businesses. It is the general rule at most dealerships that you can qualify for fleet leasing only if you agree to lease 10 or more vehicles. A fleet entitles you to a registration number and all available manufacturers' and dealers' fleet incentive programs.
However, "some companies, including Ford, have lowered their eligibility criteria down to five or more vehicles," says Mike Antich, editor of Automotive Fleet magazine. Toyota's fleet leasing program also accommodates five-vehicle leases.
The key is to shop around. Some dealers will even work with a customer who wants a two- to five-car fleet, offering special discount programs, incentives and customized maintenance contracts. And if you need only a handful of vehicles, Chevrolet can group you together with another small business in similar circumstances so you can both qualify for the benefits of a 10-car fleet lease.
According to Automotive Fleet magazine, fleet leasing is projected to hit a record volume this year, especially in vans. The reason? Vans are replacing station wagons and large sedans in popularity.
Another new trend in fleet leasing: Fleet management companies are bundling more services together. By offering lessees the option to turn over fleet management, dealers are relieving business owners from the hassles of handling the work in-house. These services (which you may be charged extra for) include registration renewals, billing, maintenance, and expense and accident reporting.
One advantage of fleet leases is a clause guaranteeing that the dealer will supply a replacement vehicle should the leased car or truck break down. Check the small print on the lease to ensure this clause is included.
Leasing programs can differ greatly from region to region in the United States. Independent leasing companies, found in the Yellow Pages under "Automobile Leasing," can often save you some legwork. They understand the market, can pull vehicles from different dealers if necessary, and can find financing that will provide you with the most advantageous benefits.
Shopping around and doing your homework is still the best way to get a good deal. Then check with your accountant to make sure individual or fleet leasing is good for your business.
Automotive Fleet, 2512 Artesia Blvd., Redondo Beach, CA 90278, (310) 376-8788;
Cadillac, (800) 458-8006;
Ford Motor Co., (800) 421-0494;
GMAC, (800) 32-SMART;
Lexus, (800) 25-LEXUS;
Toyota, (800) 331-4331.