UNDERSTANDING DIFFERENCES BETWEEN LEASING AND BUYING A NEW VEHICLE
WHY ARE LEASE PAYMENTS LOWER?
When you buy a vehicle you are paying for the total cost of the car or truck. When you lease, however, you are paying for the difference in value between what the vehicle is worth when you buy it and what it is worth when you return it at the end of the lease. For example, if you buy a $10,000 car you pay the entire $10,000 (plus interest). If you lease the same $10,000 car for three years, the monthly payment will generally be calculated as follows:
- the "capitalized costs" or selling price is $10,000
- after three years, you guarantee that the value at the end of the lease ("residual value") is $5,000
- your monthly payment will be based on $5,000 (plus any lease acquisition fees, taxes or insurance charges plus interest) divided by 36 months.
WHAT ARE THE RISKS OF LEASING?
The primary risk of leasing is that the residual value of the vehicle may not be as high as you had guaranteed. If the value is lower, then you must pay the difference. That guarantee is defined differently in different leases. Some common methods are:
Mileage allowances. Typically a lease agreement will set forth a number of miles that you are allowed to drive the vehicle without paying extra charges. Typically, you may drive between 12,000 or 15,000 annually without extra charge. At the end of the lease you will pay 11-20 cents for each excess mile. For example, if your three-year lease allows 12,000 miles per year (36,000 miles for 3 years) and you drive the vehicle 46,000 miles you must pay for the excess. If your lease set excess mileage charges at 20 cents per mile you would owe 10,000 times 20 cents which equals $2,000.
Repairs. At the end of the lease you do not have to pay for "normal wear and tear." Needed repairs caused by your negligence, however, must be paid for. You are generally allowed to either get the repairs made yourself or allow the leasing company to have them made. Some leases require security deposit paid at the beginning to cover such repairs.
Open end leases. With an open end lease, the leasing company appraises the resale value of your vehicle and then compares this amount to the estimated residual value stated in your lease contract. If more money is owed to the leasing company over and above the security deposit, you must pay the leasing company. This is called a "balloon payment". If no charges are assessed, your deposit is refunded to you.
Closed end leases. Most vehicle leases are closed end. The leasing company assumes the risk that the residual value will be lower than estimated. You are responsible only for any excess mileage charges or needed repairs.
CAN I END THE LEASE EARLY?
Generally you are allowed to terminate the lease before the end of the term. Most leasing companies do, however, assess additional charges.
CAN I BUY THE VEHICLE AT THE END OF THE LEASE?
Most leases do allow you to buy the vehicle when the lease expires for a price which is set in the original lease contract. Generally you have the option to either pay cash, arrange your own financing or finance with the lease company.
WHAT DOES THE LAW REQUIRE THAT THE LEASING COMPANY DISCLOSE TO ME BEFORE I SIGN THE LEASE?
First the law requires that you receive a written statement of the costs including:
- The amount of any advance payment (such as a security deposit),
- The number, amount, and dates your regular payments are due,
- The total amount of your regular payments,
- The amount that you must pay for license, registration and taxes, and for any other fees, such as maintenance.
Second, the law requires that you be told in writing about certain terms of the lease including:
- The kind of insurance that you need,
- Any express warranty on the property,
- Responsibilities for maintenance and repairs,
- Any standards for "normal wear and tear",
- Penalties for default or late payment,
- How either party can cancel the lease and any charges to do so, and
- Whether or not you can buy the property and under what terms.
DOES THE LIMIT THE AMOUNT WHICH MAY BE CHARGED?
Generally no. There's one exception, however. "Balloon payments" are presumed to be excessive if they exceed three times the average monthly payment in an open end lease (unless you agree to make a higher payment or you use the property more than the average). The leasing company may seek a larger payment by going to court, where it has the burden to prove that its original estimate, although wrong was reasonable and made in good faith. The leasing company must pay your attorneys fees in such a lawsuit, whether or not it wins.15 U.S.C. 1667b(a).
In an open end lease, if you disagree with the leasing company's determination of residual value, you may obtain at your own expense, a professional appraisal of the leased property by an independent third party agreed to by both you and the leasing company. That appraisal is final and binding on you both. 15 U.S.C. 1667b(c).
There is no specific limit on the penalties or other charges for delinquency, default or early termination which may be specified in lease. Such charges, however, must be "reasonable" in light of the anticipated or actual harm caused by the delinquency; default or early termination; the difficulties of proof of loss and the inconvenience or difficulty in otherwise obtaining an adequate remedy. 15 U.S.C. 1667b(b).
WHAT RESTRICTIONS DOES THE LAW PLACE UPON THE ADVERTISING OF LEASES?
If the leasing company advertises the amount or number of payments or that there is no down payment , the ad must also mention several other important terms. Included are (a.) the total regular payments, (b.) your responsibilities at the end of the lease, and (c.) whether or you may purchase the property. This is to make sure you get enough information from the advertisement to understand the offer and compare it with others. 15 U.S.C. 1667c.
WHAT ARE THE PENALTIES IF THE LEASING COMPANY VIOLATES THE LAW?
If the leasing company fails to give you the required information, or does so improperly, you may sue for damages equal to 25% of the total of the monthly payments (but not less than $100 nor more than $1000) plus any actual damages which are suffered. 15 U.S.C. 1667d(b) & 1640 (a)(2) (A). If an advertisement violates law you may sue the leasing company for your actual damages. 15 U.S.C. 1667d(b). In any successful lawsuit you may also recover your court costs and reasonable attorneys fees. 15 U.S.C. 1640 (a) (3). You must sue within one year of the termination of the lease agreement. 15 U.S.C. 1667d(c). The law also provides criminal penalties for violators.
IS THE DEALER REQUIRED TO DISCLOSE WHETHER THE VEHICLE IS A "SALVAGE VEHICLE"?
Yes, effective October 1, 2003, dealers must:
- disclose in writing any information that the dealer knows or reasonably should kow concerning whether the vehicle is a "salvage vehicle" before executing a contract of sale or a long term lease
- provide a copy of the disclosure to the buyer and
- retain the written disclosure in the dealer's records.
A "salvage vehicle" means a motor vehicle that at any time has been declared a total loss vehicle, (which means the cost of repairs are more than 65% of the vehicle's Fair Market value), flood damaged vehicle, non-repairable vehicle or had salvage or a similar word placed on any title issued for the vehicle. Moreover, a dealer shall not remove or conceal a marking on a title which indicates that the vehicle is a salvage vehicle.
If you are harmed by a dealer who violates the new law, contact an attorney immediately. Violaters may be charged with a crime and ordered to pay restitution to the victim. A person who violates the new law, with the intent to defraud, is liable to any purchaser or lessee of a motor vehicle who is harmed by the violation for either three times the actual damages, $5,000 or actual damages plus punitive damages allowed by the court, whichever is greater. If you win a lawsuit, you can recover costs plus reasonable attorney's fees.
The Federal Trade Commission (FTC) is responsible for enforcing the Consumer Leasing Act. You may contact the regional office in San Francisco at (415) 744-7920. If you have been damaged by a violation you may wish to contact an attorney.