Orange County
Family and Consumer Education News Articles

by: Deborah Taylor, Family and Consumer Science Extension Agent

Understanding Automobile Leasing

Due to the rising costs of automobiles, leasing has become a viable option for many Americans, preferable many times to the purchase of an automobile. There has been a 23.4% increase in the number of automobiles and light trucks being leased within the period between 1987 to 1998. Nearly one-third of all new cars are now obtained by leasing instead of purchase. The most popular reasons cited for leasing vehicles are (1) a lower monthly payment, (2) no/low down payment, and (3) the ability to drive a nicer car. The term "down payment" usually applies to credit or finance agreements when purchasing a car. The term "capitalized cost reduction" (or amount due at lease signing) is used in vehicle leasing. Both serve to reduce the principal that will be financed over the term of the agreement. Seventy percent of those who lease a vehicle make a capitalized cost reduction (which can include the first month's payment, security deposit, acquisition fee, and other costs) although no/low "down payments" are considered to be an advantage of leasing.

Before going into a lease agreement, it is important to know the advantages and disadvantages of this car purchasing option, and to realize that it can be a complex procedure that is quite different from standard leasing agreements such as in rental housing. There are a few very important tips to keep in mind when entering into an automobile lease agreement.

• Early termination may be voluntary or involuntary (for example the vehicle is returned early, stolen, or totaled, or you default on the lease). If you default on making your lease payments, that is also considered an early termination, and early termination charges will apply.
• In addition to keeping the car in good mechanical condition, consider how likely you are to get permanent stains or holes in the seats, and whether the car will sustain dings and chips in the paint. In a lease, you may find excess wear charges assessed for not keeping the car in good condition.
• Although the security deposit is refundable, if you have excess mileage, charges or excess wear charges, these amounts may be deducted from your security deposit.
• Most lessors will require that you carry 100,000/300,000 coverage. If you have not carried this much insurance before, you will see your insurance premiums go up. Insurance companies do not usually charge different rates for leased and owned vehicles.
• Monthly lease payments are usually lower than monthly loan payments because you are paying only for the vehicle's depreciation during the lease term plus rent charges (like interest), taxes, and fees. Monthly loan payments are usually higher than monthly lease payments because you are paying for the entire purchase price of the vehicle, plus interest and any other finance charges, taxes, and fees.

Know your rights and responsibilities. Read your contract thoroughly to understand what you're agreeing to. THERE IS NO COOLING OFF LAW THAT COVERS PURCHASES OR LEASES AT VEHICLE RETAILERS. Know what you are agreeing to before you sign. You are responsible for abiding by all the terms and conditions of the contract.

For additional information please contact: Deborah_Taylor@ncsu.edur@nc su.edu, County Family and Consumer Science Extension Agent, Orange County Center, North Carolina Cooperative Extension .

This web page created by Carolyn Langley, Area Specialized Agent on May 11, 2000.
Last updated on May 11, 2000.