The Dark Side of Leasing: What Car Buyers Should Know

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Leasing a car can be the right decision in some cases. You can enjoy driving a new car without putting down a large sum of money or slide behind the wheel of a used car with little investment.

The average lease payment in 2016 was $120 less than an average finance payment on a new car, according to a 2017 report from Edmunds, a car-comparison and research site. For large pickup trucks, the savings were even higher: $206.

Lease contracts also require less commitment because they last an average 36 months, while finance agreements average 69 months, Edmunds reports.

What you need to know about leasing a car

For drivers who are unlikely to exceed a contract’s mileage cap and will take good care of the vehicle, leasing can be a good option.

A growing number of Americans are leasing instead of purchasing, according to the 2017 Manheim Used Car Report. A record-breaking 4.4 million new leases originated in 2016, according to the Atlanta-based provider of vehicle remarketing services. (Edmunds puts that number at 4.3 million, but either way, it’s a new high.) Leases also exceed 30 percent of the new vehicle market for the first time ever in 2016, Edmunds reports.

But there’s a dark side to leasing. Autos were the number one subject of consumer complaints in 2016, according to the Consumer Complaint Survey Report conducted by Consumer Federation of America (CFA) and the North American Consumer Protection Investigators (NACPI). The report cited multiple complaints about leasing, including used-car leasing.

“It seems like more and more people are not wanting to fork out lots of money for a new car, which makes sense. But it’s very shocking to see a growing number of people lease used cars when they don’t have protection,” says Amber Capoun, president of NACPI.

While the cheaper price tag on a used car lease can be enticing, consumers leasing older cars may lose protection if it is no longer covered by a warranty, says Mark Anderson, a consumer protection attorney at Anderson, Ogilvie & Brewer in San Francisco.

Must-know facts about leasing

If you are considering leasing a car, watch out for these six pitfalls.

1. Credit score hit

When you lease a car, a credit inquiry is conducted, just like when applying for a car loan. Your credit score will fall slightly, but it can be rebuilt by making timely payments.

A lease payment may be less per month than a finance payment, but missing a payment or ending your lease early can further reduce your credit. If you don’t have a strong credit history, you may need a co-signer. However, both you and your co-signer should be aware that late payments can damage both credit scores.

2. High interest rates

At first glance, the interest rate — the amount you pay for borrowing the lease company’s money while you drive their car — may appear lower than the annual percentage rate (APR) you would pay to finance a vehicle. That is because the rate is expressed in the leasing agreement as the “money factor” and is a very small number, like 0.0022. To calculate your lease’s APR, multiple the money factor by 2,400, which would be 5.28% APR.

The interest rates on used cars are usually even higher, since the vehicle value at the end of the lease is difficult to predict. Don’t forget to multiply that low “money factor” to figure out your interest rate. It could make all the difference in your ability to afford leasing a car. Good credit will help you get a better interest rate.

3. Lack of consumer protection

An older car with higher mileage may have exceeded its warranty by the time you lease it, which means you are responsible for repairs that would have been covered under a warranty on a newer car, or a car with lower mileage.

The Consumer Leasing Act requires lessors to disclose certain information, including conditions for early termination, the lessor’s standards for wear and tear, and all fees and taxes before a lease is signed, but a company can take advantage of you if you are unprepared. Consumer protections and lemon laws differ state to state, Capoun says, and can leave drivers on the hook for costly repairs. While all lease agreements allow
for normal wear and tear, contracts vary greatly.

“You are the one who’s responsible if your car breaks down, so it’s very important to read the fine print before signing a lease and know what’s included in the contract,” Capoun says.

Consumers should also be wary of third-party “extended warranty” offers, which Anderson says are far more reliable than automakers in providing services and repairs.

“Lemon law applies to leases, but it won’t protect you if you don’t fulfill your payments. You’ll get hit by some steep fees,” Anderson says. “And people often forget leasing doesn’t mean you own the car. If you miss a payment and the car gets repossessed, you don’t have any rights.”

4. Hidden costs

Anything from a small scratch to ending your lease early could result in a hefty fee. The acquisition and delivery fees (which both range from $300 for compact cars to $900 for luxury vehicles) are some of the largest, and unexpected, expenses.

Upon returning your car, be prepared for the car to be looked over with scrutiny. The dealership wants the car returned in “salable” condition so it can be sold or leased to someone new at its highest value. Any damage or changes detract from that value, and you can be fined. If you want to make alterations to your car, they should not be permanent. You also will be responsible for the majority of the maintenance and repair costs, which add up the longer you lease.

Even leasing new cars can be dangerous, says Stacey Nix, a 52-year-old mother of three in Valdosta, Ga. Nix and her husband once leased a car, but say they never will again after being stuck with extra costs for exceeding the mileage limits stipulated in the leasing contract.

“I felt we were misled and not told all the facts,” she says.

Exceed that mileage limit — even by a mile — and you’ll be hit with another fee. Be sure to know exactly how many annual miles your contract allows, usually 15,000 miles or less, and keep an eye on your odometer. Mileage fees typically range from 15 cents to 30 cents per mile, depending on the vehicle.

5. Lack of equity

Over time you will likely end up paying more than the vehicle is worth, but you haven’t gained any equity toward buying a new vehicle. At the end of a lease, you do not own the vehicle, which means you cannot sell it and take advantage of its residual value and profit off the vehicle. Despite higher monthly costs, when you purchase a vehicle, its cash value is yours to do with it as you wish.

6. Pricey, and limited, exit options

Ending your lease early can result in having to pay anything from a fine to the remaining balance on your lease. No one can predict the future, so it is important to know your exit options, and how much each will cost, before signing your contract.

One exit option is buying the car outright. Each lease has different payoff or buyout options, some of which can be negotiated, but each car’s value varies so it is difficult to predict just how much your car will be worth. You also can trade in your car for one with a cheaper lease, but you will have to pay penalties and fees for ending the other lease early. Finding someone to take over your lease is another option, but yet again, you won’t avoid fees.

Tips for protecting yourself from a bad lease

1. Consider all of your options

Is leasing really for you? Once you sign a contract, you’re bound to that agreement. If you don’t think you will exceed the mileage allowance, damage the car, and have to end the lease early, and don’t mind not building equity, then leasing might be the right decision. The Federal Trade Commission has guidelines to help you decide whether you should finance or lease a car.

2. Remember the old school rules

Taking a car to a mechanic you trust first can prevent you from driving off the lot with a car full of problems. Asking about warranties and what is and isn’t covered by the dealership or the manufacturer can even save you legal trouble, Anderson says.

3. Negotiate, negotiate, negotiate

Everything from the overall price to aesthetic changes to a car can be negotiated. Good credit could give you the edge: Lessees had an average FICO Score of 716, eight points higher than new vehicle buyers, according to the Manheim survey. Other smaller fees, like document-processing fees to service fees, can be negotiated if you’re willing to put in the effort. Negotiations also can help save you money in unpredictable situations like accidents or terminating a lease early. Finally, never forget to ask about any leasing specials.

4. Understand your contract, down to the nitty-gritty

Leave with a copy of your lease so you always have the official contract to reference and can hold your lessor accountable to the agreement. You also can use the Consumer Leasing Act’s examination checklist to ensure all of the proper details are disclosed during a lease signing.

The post The Dark Side of Leasing: What Car Buyers Should Know appeared first on MagnifyMoney.

Would You Share a Car With Friends? A New Ford Program Thinks So

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Many people opt to lease their car instead of buy it because of some of the conveniences that can come with this option.

And a new program from Ford could be taking this a step further with its car share program. Ford Credit Link, which is running its pilot program in Austin, Texas, makes it possible for a group of three to six people to share a lease and a car.

“People are already sharing books, homes and a number of things in between,” Margaret Mellott, a spokesperson for Ford Credit said in an email. “This Ford Credit experiment in Austin is asking if the trend toward sharing might apply to sharing the lease of a vehicle by a group of people who may not need a full vehicle lease to meet their mobility needs but who might like to have convenient access to a vehicle when they need or would like to use one.”

The lease is for 24-months, Mellott said.

To take part, “each person in the group must qualify for credit under our consistent credit criteria, and each person is liable for the full amount of the contract,” Mellott said.

The program uses an app that pairs with a vehicle plug-in device the dealership installs in the car. This makes it possible for users to monitor the car, reserve drive time and make car payments.

Even though this program was announced earlier this year, no one has currently signed up to take part. Mellott says their site is seeing a lot of traffic, but claims the lack of participation is because “people seem to be doing their homework as they consider how this might fit their lifestyles.”

Securing an Auto Loan

Doing your homework on a large investment, like an auto loan, is always a good idea. If you’re in the market for a new car, part of your research ahead of time should include checking your credit scores. Doing so will give you an idea of what terms and conditions you may qualify for when taking out a loan. You can do this by viewing two of your credit scores for free, updated each month, on Credit.com.

If your scores aren’t where you’d like them to be, you can work to improve them. You can get your free annual credit report at AnnualCreditReport.com and review the reports for any errors you may need to dispute. You can also take steps like paying down any credit card debt you may have and avoiding new credit inquiries while you work on rebuilding your credit.

[Offer: Denied from a loan? It may be because of a low credit score due to errors on your report. Lexington Law can help you navigate the credit repair process so you can get back on track. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

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Car Leasing Is All the Rage. Is It a Good Deal?

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Old Betsy’s reign in the American driveway may be over. After all, why would you name a leased car?

Americans are no longer looking for a long-term relationship with their cars. Auto leasing is in the midst of a historic rise, setting all-time records quarter after quarter, and now makes up nearly one-third of the new car market, with millennial leasers leading the way. Consumers have begun to treat cars the way they treat cellphones — holding on to them until contracts run out, then happily exchanging them for the newest thing.

The records come just a few short years after leasing was all but left for dead during the Great Recession, when auto sellers shunned the practice, and leasing fell to only about 10% of the market. At the end of last year, auto leases made up 33.6% of all new car financing during the quarter — and 28.9% of all purchases — according to Experian Automotive.

A Nicer Car for Less

The appeal of leasing to consumers is obvious: The monthly payments are less. Experian offers these examples: An average new Toyota Rav4 loan last year cost $431 per month, while a lease cost $322; a Chevy Silverado costs even less per month, $544 vs. $384.

Many consumers use that savings to end up in nicer cars, and leasing can really expand consumers’ options. Here’s a calculation from Edmunds.com: Buyers with a $3,000 down payment and willing to pay only $300 per month can buy a $20,000 car, but they can lease a $35,000 car.

“People shop for vehicles largely based on monthly price, and right now, average dollar amounts for new-vehicle loans are soaring,” Melinda Zabritski, senior director of automotive credit for Experian Automotive, said. “In order to stay within their budget goals, we have seen that more consumers — even those within the prime and super-prime risk categories — are turning to leasing.”

Millennials are even more likely to opt for leasing, according to Edmonds. Leasing among younger adults is up 46% in the past five years, the firm says.

“Most millennials understand and accept that they’re on a tight budget and that they need to stick to it,” said Jessica Caldwell, director of industry analysis for Edmunds.com. “But it doesn’t mean that their financial constraints limit them only to the most basic vehicles to get from Point A to Point B. If they see a chance to get into a nicer car while staying within their budget, they’re likely to explore that opportunity. In most cases, leasing opens the door to the bells and whistles that they couldn’t otherwise afford.”

The Drawbacks of Leasing

Of course, leasing is hardly perfect, and has a well-earned reputation for causing consumer headaches. The biggest bugaboo is mileage limits: Many limit drivers to 12,000 miles annually, a serious disincentive for road trips. Also, while it’s easy to turn in a leased car and get into a new lease, it can be harrowing to drop off a leased car at the end of a term and face potential damage claims from the dealer or mileage overage payments. Many drivers find their insurance rates go up when they lease because of increases in mandatory coverage (check with your insurance company before you shop around).

And while leasing is attractive to people with long-term car commitment issues, a lease can be even more of an anchor than an owned car. Consumers who move and can’t take their car find out the hard way that getting out of a lease is even worse than getting out of a cellphone contract. Car leases can be transferred, but it’s easier to sell a car you own.

Still, leasing has become mainstream. Once more popular with luxury car drivers, leasing is now common for mid-level and discount brands. The Honda Civic was the most-leased car last year, followed by the Accord, Camry and Rav4, Experian says.

So, should you lease? One truth overrides all the details about leases: In the end, leasing costs more than buying. You pay for those lower payments by not owning anything at the end of the lease term. The best deal, financially, is buying the car. But the difference can be only a few thousand dollars, and that may not matter to you.

On the other hand, if you are leasing mainly because it feels cheaper than buying, you are almost certainly making a mistake. Long-term, buying is the cheaper option, especially if you don’t mind holding onto your car for more than a few years.

Luxury cars that lose value quickly (and often aren’t needed as “everyday” cars) still make the most sense to lease. People who live very close to work (or work at home) and don’t pile up telecommuting miles are good lease candidates. And if you really do want a new car every three years, and don’t mind knowing that you haven’t gotten the absolute best deal you can, consider leasing. But know that there is always a risk when you turn the car in at lease’s end that a dealer in a bad mood may try to nickel-and-dime you for every carpet stain. If you tread very lightly on your floor mats, you’ll probably be fine. But if you drive hard, a surprise end-of-lease wear-and-tear bill could make those lower monthly payments seem pretty expensive.

Remember, your credit score can directly impact your ability to get the best deal on a car lease. You can check your scores, along with the major factors impacting them, with your free credit report summary each month on Credit.com.

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