Consumer Reports Commentary

We applaud Consumer Reports for its continuing in-depth coverage of vehicle leasing. However, we want to clarify and expand on some reported items that may have confused consumers in their report. ACVL comments and additional information have been inserted into the Consumer Reports article as “ACVL Comments” in bold italics.

Feature Report, January 2001
(taken from Consumer Reports, Dec. 14, 2000)

It’s the Lease You Can Do

7 Keys to Unlocking Thousands of dollars in Savings on your Next Auto Lease

One out of every three new cars, minivans, sport-utility vehicles, and light trucks consumers drive off dealer lots these days is financed by a lease. That’s up from fewer than one in ten a decade ago. Clearly, the emergence of leasing marks the biggest change in the way Americans put themselves behind the wheel since the advent of the installment car loan.

It’s easy to see why consumers find leasing so seductive. After all, with little or no money down and for a “low” monthly payment, you can drive an automobile you never imagined you could afford to own. Then after enjoying the most trouble-free two or three years of the vehicle’s life, you simply bring it back to the dealer and lease another new one. No worries about paying for the upkeep of an older car or haggling over trade-in values. With a lease, the scent of fresh leather upholstery need never leave your nostrils.

But the hassle-free image of leasing that auto manufacturers and dealers are eager to project can be a mirage. We evaluated scores of lease ads appearing in ten metropolitan newspapers across the U.S. and turned up dozens of offers that could mislead or even deceive an inattentive shopper.

Our analysis of terms quoted by the behind-the-scenes finance companies that actually write the contracts for 30 of the most commonly leased cars, SUV’s, and light trucks revealed that the cost of leasing identical vehicles can vary by thousands of dollars over the life of the lease. (See Lease deals.)

And a special survey we commissioned of a nationally representative sample of 305 recent lease customers showed that a majority had done a poor job of shopping for the vehicle, negotiating the most favorable terms, or steering clear of costly end-of-lease charges

This is not to say that leasing can’t be a satisfying and cost-effective way to acquire a new vehicle, but it’s a mistake to think that leasing is easier or less expensive than purchasing.

Indeed, for all its superficial simplicity, a lease transaction is a tangle of arcane language and buried details that can ensnare even an experienced customer.

If you’re considering leasing your next vehicle, here are seven key steps that will improve your odds of landing a good deal.

Key 1

Be sure leasing makes sense for you

A lease comes with lots of limitations on how you can use your new vehicle.

Do you drive a lot? Do you load your trunk or roof rack with paint-gouging flea-market treasures? Is your car a magnet for parking-lot dents and dings? Are your kids apt to turn its interior into a finger-painting studio? If so, you face a potentially costly problem trying to live within the tight strictures of a lease. That’s because you’ll be assessed for what the leasing company determines to be excessive wear and tear to the vehicle when you return it at lease-end.

You’ll also be charged anywhere from 10 to 20 cents for every mile you drive beyond what your lease allows. Leasing novices are particularly at risk of running up these costs. Nearly one-third of the first-time lessees in our survey were hit either with excess mileage or wear-and-tear charges.

Of course, the value of any car–whether leased or purchased–will be reduced if it is abused or driven hard. But if your driving patterns expose you to these risks, it’s better to discover them before you even entertain the possibility of leasing.

To determine whether the leasing lifestyle is for you, look ahead to the full term of your lease. How likely are you to change jobs or move to a new home that requires you to rely on your leased vehicle for a long daily commute?

Will one of your children begin driving over the coming few years? If so, leasing may not be the right choice.

Drivers who are hard on their vehicles aren’t the only poor lease candidates. Driving too little can also saddle you with unnecessary costs. Among our survey respondents, for example, 20 percent of the drivers over age 55 returned their leased vehicles to the dealer having driven at least 10,000 fewer miles than their lease allowed. Since they got no credit for that unused value, they gave the leasing company what amounted to a windfall when it resold the vehicle.

Valuing those unused miles at 10 cents apiece, that subsidy to the dealer can add up to $1,000 or more.

(To size up your own lease suitability, answer the questions on the Is Leasing Right for You? quiz.)

Key 2

Know what’s in the ads – and what’s missing

It takes a sharp-eyed skeptic to deconstruct a lease advertisement. Most of the ads we examined were revealing less for what they said than for what they omitted or obscured. Typically, the most prominent piece of information they feature is how much you can expect to pay per month. But you have to scrutinize the fine print to discover that the monthly payment is most commonly computed on the basis of the manufacturer’s suggested retail price (MSRP), in effect making you pay top dollar for the vehicle.

Here are other common ad twists and tricks you should watch out for:

• Act fast. A careful shopper needs time to visit dealers and weigh competing offers – time that many lease ads don’t let you have. For example, an ad run by the finance subsidiary of Volvo of North America in the July 30 edition of the Chicago Tribune promoted an attractive-sounding 36-month lease on a new S80 sedan at $499 per month. But to qualify for those terms, the customer who first comes across the ad that day would have just one day to sign the lease and take delivery of the vehicle just three days after that.

• Minimal mileage allowances. Most of the lease ads we reviewed based their offers on an allowance of 12,000 miles–pretty skimpy for anyone who depends on a car to make a long daily commute. And even lower mileage limits are becoming more common. An ad run last fall by White Plains Honda in suburban New York, for example, promoted a 36-month lease on a 2001 Accord that came with just 10,000 miles a year. Exceed that low limit and you’ll pay a hefty 18 cents for each additional mile.

• Leases that outlast the vehicle’s warranty. An ad from Miami Lakes Mitsubishi appearing in The Miami Herald last summer offered what at first seemed to be an unbeatable $169-per-month lease on a 2000 Galant. But a closer look revealed that the low monthly payment applied only to cars leased for a minimum of 60 months–longer than the 3-year or 36,000-mile warranty standard for most components of that make and model. That puts the lease customer at risk of having to pay hefty out-of-warranty repair bills on a vehicle he or she doesn’t own. We saw ads for lease terms as long as 51/2 years.

Key 3

Keep your mind open to buying – and don’t compare Kias with Cadillacs

Unless you can claim tax deductions for the business use of an automobile, leasing offers no inherent financial advantages over buying.

But our survey findings suggest that substantial numbers of consumers fail to focus on the economics of their lease deal. In fact, more than one-quarter of our survey respondents never considered any alternative to leasing.

Take these steps before you commit:

• Educate yourself about the vehicles you want to consider. What you end up paying in a lease comes down to the same variables that influence how much it would cost to buy the same vehicle: its price when purchased new, how well it holds its value over time, and prevailing financing costs.Before you set foot in a dealer’s showroom, take time to investigate the vehicles that interest you. Be sure to compare them on an equal basis, gathering prices for identical models and trim lines and understanding what’s included in the basic option packages. The Internet is a good place to begin your research. For a list of helpful web sites, see Lease links online.
• Check your credit history. Lease-finance companies routinely size up customers to determine whether they are good credit risks before closing the deal, and they save their best terms for customers whose profiles show unblemished records.

That’s why it makes sense to get up-to-date copies of your credit record from the three major credit-reporting agencies–Equifax, Experian, and TransUnion. Do that at least 60 days before you negotiate to finance or lease a vehicle, to allow enough time to spot errors in your report and begin to correct them before you close a deal.

• Investigate bank auto-loan rates.You won’t be able to make an accurate comparison between leasing and buying unless you arm yourself with information about the most competitive financing terms for which you qualify. Check rates at your local bank or credit union, or shop for rates online at www.bankrate.com, the web site of Bankrate.com, a research firm that updates terms from some 4,000 lenders on a daily basis. To keep your financing options wide open, gather details for loans with terms of 36, 48, and 60 months.

• Look for “subvented” lease deals. As you gather vehicle prices and loan-rate information, keep an eye on the automotive section of your local paper for so-called subvented lease offers. These special deals are typically offered by auto manufacturers through their subsidiary finance arm (and labeled as such in the fine print). Unlike the standard terms independent leasing companies offer, the subvented deals usually provide attractive incentives, such as lower financing charges and manufacturer rebates. They can be useful in identifying the most-competitive lease terms for the vehicles that interest you.

• Visit several dealers. None of the information you gather will help much if you fail to visit at least three dealer showrooms. Yet curiously, lease-oriented customers are far less likely than buyers to compare competing offers. Just 38 percent of the lessees in our survey talked to more than one dealership in search of the best terms (compared with 63 percent of the buyers).

Key 4

Negotiate the Purchase Price

When you contact a dealer and declare yourself interested in leasing, the sales rep will want you to focus on just one number – the monthly payment. Indeed, the entire process of leasing appears designed to throw up intimidating barriers, making it hard for you to consider anything else.

The very language of leasing is so opaque that it obscures the simplest elements of the transaction. Ordinary words, like “purchase price,” “down payment,” “finance charge,” and “trade-in value” have morphed in leasing parlance to “gross capitalized cost,” “capitalized cost reduction,” “money factor,” and “residual value,” respectively.

Perhaps put off by this verbal smoke screen, 22 percent of our survey respondents told us they didn’t bother to negotiate lease-payment terms at all.

Approach the negotiation as if you intend to purchase the auto. And when you bargain, ignore the vehicle’s sticker price, and begin from the invoice price (what the dealer actually paid for the vehicle) or better yet from the Consumer Reports Wholesale Price (the invoice price minus customer and dealer incentives and holdbacks). You can get both of those prices from the Consumer Reports New Car Price Service. (See the Lease links online for other sources of price information.)

By bargaining up from the vehicle’s wholesale price, you can potentially shave thousands of dollars from your total lease cost. For example, leasing a Ford Expedition based on a price that’s just a few percentage points above the Consumer Reports Wholesale Price could drop the monthly cost to as much as $140 below what you’d pay for a lease based on MSRP for the same vehicle – a saving of some $5,000 over the life of a 36-month lease. You may not realize such big savings on vehicles that are in short supply, where you may end up paying closer to full retail price, but it’s always in your interest to negotiate. (Lease deals provides estimates of maximum potential savings over a 36-month lease for 30 of the most commonly leased models.)

Key 5

Compare Alternative Lease-finance Companies

Most auto dealerships work with at least four leasing companies, and terms can vary significantly among them. The savings from choosing the right leasing company can be big. On a 36-month lease for a 2001 Chevrolet Blazer, for example, GMAC sets the residual value at $14,219, or nearly $1,300 more than an equivalent lease offered by Wells Fargo Bank. At the same time, the effective annual percentage interest rate a top-tier credit customer would pay under a GMAC lease based on MSRP is just 5.06 percent.

The same creditworthy lease customer would pay 9.73 percent with a Wells Fargo lease.

Together, those better GMAC terms reduce the monthly payment for the Blazer to $454 from a monthly $568 with Wells Fargo. That adds up to a total saving of $4,104 over the life of the lease. Generally, the finance subsidiary of the manufacturer whose vehicles the dealer represents – General Motors Acceptance Corp. (GMAC), for example, or Ford Motor Credit – will provide the most-attractive terms. This option is worth asking about first.

Key 6

Plot your End-of-lease Strategy Before you Sign

The lease contract will spell out conditions you’ll be expected to meet when it comes time to return your vehicle, so the time to decide whether you can live with those terms is before you sign. Here’s where to look for lease-endgame advantages:

Choose the right mileage allowance. If you exceed the mileage limitation stipulated in the lease, you could end up paying as much as 20 cents for each additional mile you drive. You may be better off purchasing additional miles at a discount before you take possession of the vehicle, as 32 percent of our survey respondents chose to do when they leased. The saving can be significant, since most lease-financing companies will let you boost your mileage limits at the lease inception for anywhere from 8 to 16 cents a mile.

But remember, the more miles you buy and use, the more likely you are to incur charges for excessive wear and tear. So make sure you understand what the dealer deems excessive before you sign the lease.

Consider your end-of-lease purchase option. You may end up liking the performance and reliability of the vehicle you lease and ultimately decide you want to buy it when your lease is up. That’s why it makes sense to pay close attention to what the lease sets as the residual value, or what the auto would be expected to sell for used. The lower the residual value, the less you would have to pay to buy. But because a lower residual value will result in a higher monthly lease payment, you should weigh your potential interest in purchasing at lease-end before you sign the deal.

However the residual value is determined, you’re better off insisting that your lease name a specific purchase-option price so you’ll have a clear idea of what you can expect to pay if you ultimately choose to buy the vehicle. Some leases are deliberately vague about that price, and instead designate a formula to determine the vehicle’s ultimate cost when the lease expires.

Key 7

Don’t Get Taken for a Ride at Lease-end

A satisfactory leasing experience can unravel expensively at lease-end if you let your guard down. Because you’ll be giving up your leased wheels, the dealer knows that you have little choice other than to buy or lease another vehicle. Indeed, some dealers will try to strengthen their bargaining hand by telling you that you will be charged for excess wear and tear on the vehicle, then offer to forgive those charges if you agree to lease a new vehicle.

But if, on the other hand, you drove many fewer miles than your lease allowed, you may want to investigate whether it makes sense to buy the vehicle at the purchase-option price the lease stipulates and then resell it on your own if its market value is higher.

Here are other ways to minimize end-of-lease expenses:

Have an independent garage repair your vehicle. You’re under no obligation to have the dealer who originally leased you the car do the end-of-lease repairs. At least one month before your lease is due to expire, have the vehicle pre-inspected. (Many leasing companies provide this service free.) Then, collect bids from mechanics or body shops you trust to determine the least expensive way to make the necessary repairs. And when you return the vehicle, insist on getting a signed vehicle-inspection worksheet documenting its condition before you turn over the keys. That way, you can’t be held responsible for damage that may occur later.

If you’ve driven your full allotment of miles, you may also need to replace the tires – something you can do less expensively with a bit of shopping than simply by allowing the auto dealership to charge you top dollar for its treads.

But if you do replace tires, expect to pay for all four. Most leases specify that tires must match.

Be careful of “loyalty” leases. Dealers like nothing better than to persuade existing lease customers simply to roll over into a new lease when their contract expires. Indeed, 60 percent of our survey respondents told us they went back to their old dealer for another lease. Fewer than half bothered to shop around first. You owe it to yourself to shop as carefully for your new lease as you did for your original one. If after testing the market you decide to lease anew from your original dealer, make sure that any forgiven end-of-lease charges aren’t simply rolled over into the next lease you sign. (For more on the perils and opportunities of repeat leasing – and how to break out of the serial leasing cycle – see Get off the lease treadmill.)

Remember to get your security deposit back. Many leasing companies require customers to ante up the equivalent of a month’s payment when the initial lease is signed. If you have a good credit history, you may be able to persuade the dealer to waive that fee.

But if you do have to pay it, don’t rely on the dealer to remind you to ask for your refund. As with every aspect of leasing, you have to look out for yourself.