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The Truth About Leasing - Part 4

Part 1              Part 2            Part 3            Part 4

New Regulations
In 1997 the Federal Reserve Board, who has jurisdiction over automotive lease transactions, modified its Regulation M to require dealers to disclose in writing certain facts about the lease at the time of inception. The new requirements, also known as the Federal Consumer Leaseing Act, went into effect on January 1, 1998. This federal regulation requires the dealer to disclose the gross capitalized cost (purchase price), capitalized cost reduction (cash down), adjusted capitalized cost, residual value, rent charge, lease term (number of months), and monthly payment. Although the regulation does not require disclosure of the money factor or interest rate, one can easily calculate it from the information disclosed. In addition to disclosing the terms of the lease, the new Reg M also requires disclosure of costs paid at lease signing, mathematical progression to show how lease payment is calculates, and narrative warnings for possible charges for early termination and excessive wear and tear.

Some consumer advocates argue the new Reg M requirements fall short of the mark. Omitting the implied interest rate or money factor makes it difficult for consumers to compare the lease with other lease deals and other forms of financing. It also allows the dealers to fudge the numbers to make the deal look better than it really is. Others had hoped for a "cooling-off period" to allow consumers could cancel if the had second thoughts. Also, warnings of early termination penalties and fees are stated in too generically rather than specifically stating "if you terminate you will owe x amount."

Even with these criticisms, none will argue that the Consumer Leasing Act is not a huge step forward for leasing.

After All This, Why Should I Ever Consider Leasing?
Despite all that’s been said, leasing does have some distinct advantages. The most obvious of course is the lower payment and lower up-front cost. This allows one to drive a much nicer car on a given budget. Other advantages include no-hassle disposition at the end of the lease and lower sales tax costs in most states. But leasing has one key advantage that allows a savy consumer to save thousands of dollars by using leasing as part of a strategy toward long-term ownership of a new vehicle. Here's how it works.

To stimulate sales and move inventory, manufacturers will often offer heavily subsidize lease programs. These subsidies, usually in the form of artificially high residuals and/or artificially low interest rates, can dramatically lower monthly payments and the total cost of the lease. The trick is to lease the vehicle short term, enjoy the subsidy in the form of lower payments, then at the end of the lease, buy the vehicle for a for a fair price which is far below the inflated residual. If done properly, this approach gives you the same benefits of buying the car new off the showroom for thousands of dollars less.

The above strategy requires some key assumptions:

  1. You don't fall victim to a leasing scam on the initial lease transaction.
  2. You are able to negotiate a fair price on the vehicle usually within a couple hundred dollars of invoice price. If there is a factory to dealer incentive on the vehicle, you should end up below invoice.
  3. You are able to negotiate a fair purchase price at the end of the lease.

No doubt about it, automotive leasing is not for everyone. But for those who wish to consider leasing, it is essential that they invest the time educating themselves about the facts and the potential pitfalls.


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