The path of lease resistance

Pros tend to outweigh cons for businesses mulling auto lease

Estimates are that in 1997, about one-third of all new cars on the road are leased, with the Ford Taurus being the most popular model.
In a lot of ways, leasing an automobile for business purposes makes more sense than purchasing a new vehicle. Many small-business owners opt to lease their vehicles because of financial and tax benefits, while sales staffs in large and mid-sized companies are provided with leased vehicles in order to present a positive face for the company while ensuring reliable transportation.
“Leasing is an increasingly popular way to acquire a new car,´ said Bill Barrows, director of the Colorado Automobile Dealers Association. “In some cases, leases are a better deal, especially among those people who want to have a new car, but who are not willing to lay out the money for a new-car purchase.”
In addition to being able to drive a new automobile more frequently, the advantages of leasing include low initial and monthly payments – helping cash flow – and generous breaks on taxes. On the flip side, leasing means the customer never owns the car, which for some may be a benefit. Other disadvantages include steep end-of-lease costs, limited mileage, high insurance rates and the potential for fraud and misrepresentation.
On their face, leases are fairly simple. The customer signs an agreement with the dealer, who acts as the representative of an independent leasing company, the leasing division of the auto maker or a bank. After the lease is signed and the down payment paid, the dealership sells the vehicle to the leasing agent. The customer then makes payments to the leasing company for the life of the agreement, from two to five years.
The monthly payments are based on the difference between the price of the car or truck at the time the lease is signed and its “residual value.” The residual value is an estimate of what the vehicle will be worth at the end of the lease. In nearly all cases, these monthly payments are lower than the payments associated with a new-car purchase because the customer is paying for only a portion of the car’s value.
When the lease expires, the customer returns the vehicle to the dealer and contracts for a new automobile. Most leases include options allowing the customer to purchase the car at the end of the lease, but this defeats the advantages of leasing if the customer has to finance for the purchase price.
In order to boost sales, many automakers offer lease-incentive packages with lower initial prices, greater residual values or subsidized interest rates. These can be pretty good packages, experts say, but the customer has little room to negotiate terms of the agreement, and they may not be able to get the vehicle they want.
Once the lease is signed, the customer has to live with the terms because there can be stiff penalties built into the agreement. For example, most leases set limits on how much mileage can be put on the vehicle. Once that limit – 12,000 or 15,000 miles per year – is reached, an extra per-mile charge, up to 25 cents per mile, goes into effect.
If the lease is terminated early, the customer may be responsible for the balance of the payments and a stiff penalty. Extra care in maintaining the vehicle is also required because excessive wear-and-tear charges can be steep. Vehicle service programs can be included in the terms of the lease.
The financial advantages in leasing a car or truck can be considerable. In addition to freeing up capital that would otherwise be spent in purchasing a vehicle and not being saddled with a business asset that loses its resale value, 100 percent of the vehicle’s operating costs – gas, oil, tires, tolls, repairs, licensing fees, insurance premiums – can be deducted.
When a car is leased for business, the full monthly payment can be deducted, as opposed to deducting the interest paid on a loan and depreciation when the vehicle is purchased. If the car is subject to the federal luxury tax, the tax hit may often be less if the vehicle is leased.
The customer should approach leasing with the same mindset they would in purchasing a new vehicle, i.e., shopping around for the best lease terms and thoroughly reading the lease agreement before signing.
The potential lessee should check to make sure the vehicle identification number of the car is the same one that is listed on the lease, that the vehicle is covered by the manufacturer’s warranty for the life of the lease and that the car or truck is covered by Guaranteed Auto Protection, which would cover the difference between the book value and what is owed on the lease in the event the vehicle is stolen or destroyed.
The customer also needs to be wary. While new federal disclosure regulations go into effect later this year, some sales persons have used unethical tactics, such as cheating customers out of trade-in credit or leading them to believe they were negotiating a loan instead of signing a lease agreement.
On balance, leasing a vehicle is frequently a better deal than purchasing, and by all accounts, will be a more common practice in the coming years.