Disadvantages of Leasing
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Early Termination
The terms
for early termination of most leases can be very unpleasant for
the consumer, particularly if the termination is forced, i.e.,
the car is totaled in an accident or stolen. In such cases,
insurance pay-outs often fall far short of the balance due on
the lease leaving you holding the bag. Many leasing companies
will offer "gap insurance" for only a few dollars a
month extra which is a wise investment.
There is a very good reason why it is so expensive to get out
of a lease. Consider that your monthly payment is made up of two
parts: depreciation and interest. The depreciation part of the
payment is calculated by taking the difference between the cap
cost and the residual (the total depreciation over the lease)
and dividing it by the number of months. In effect, you are
paying off the depreciation with equal payments each month.
Graphically, the depreciation is being paid "in a straight
line" (see figure).
But we all know that a car depreciates much more rapidly in
the earlier years with the biggest hit occurring the day you
drive the car off the lot. So when you terminate the lease
before you have paid all of the depreciation, you will likely be
required to pay the difference between what the car is worth and
how much you have paid on the depreciation. This difference is
often referred to as the "gap".
Some lease contracts will really stack the deck against you
with the terms for early termination. For example, some Nissan
Motors leases require the sum of all remaining payments be made
before they will release you from the lease. Always read the
fine print of the lease contract and understand your exact
liabilities for early termination before you sign.
Insurance Cost
Leasing companies tend to require higher amounts of insurance
coverage than you may normally carry. This could impact your
insurance cost considerably. Find out what the requirements are
and get an estimate from your insurance company before signing
on the dotted line.
Higher Credit Requirements
Since the expensive car you will be driving for the next 2-6
years belongs to someone else (the leasing company), the owners
want to be assured that you will make the payments on time and
will not trash their car. Therefore, the credit worthiness
standards tend to be higher for leases than conventional loans.
In other words, if you have a troubled credit history you may
have problems getting approved for a lease.
Mileage Limitations
Almost all leases limit the number of miles per year by
imposing fees typically 10 to 15 cents per mile over 15,000
miles per year. If you put a lot of miles on a car, these fees
can add up quickly.
No Ownership
Technically, when you lease a car, you are renting it. The
leasing company retains ownership of the car and you pay for the
privilege of driving (and maintaining) it. For many who have
"owned" cars all their lives, this may be a
psychological barrier.
