Is car leasing for you?

Decipher the disclosures before you seal the deal

For your next car acquisition, are you tempted to try the more popular, less expensive (or so you think) option of leasing? If so, "be aware that leasing is different from [purchasing a car]," says Carole Reynolds, senior attorney for the division of financial practices at the Federal Trade Commission (FTC). "It may be a good choice for some, but you should consider all costs, including the front-end, during and end-of-lease charges. You may have to pay taxes--i.e., sales, use or personal property--in addition to insurance, maintenance, safety and emissions charges."

Leasing is essentially renting a car over a specified term where the lessee (the consumer) pays the depreciation cost. That's the difference between the residual value (what the car is worth at lease end) and the net capitalized cost (what you pay for the car).

Leasing can be a complicated, arduous process, but with the enforcement of the Consumer Leasing Act of 1991, lessors (the leasing company) are required to spell out everything upfront: costs, terms, fees and conditions. "The way the laws are written today, leasing is still a viable option," says Cedric Rashad, CEO and president of the Rashad Group in Atlanta, whose company wrote, consulted, trained the sales executives and helped develop the lease programs for Lexus and Mercedes Benz. But keep in mind "there are about 30 to 40 ways that a dishonest car dealer could rip off the public through leasing," says Terry O'Loughlin, financial investigator for the attorney general in Fort Lauderdale, Florida, whose office has recovered $5 million to $6 million in restitution for consumers for unfair leasing practices since 1993.

"Disclosures were not initially spelled out because the lease was designed for the high-end executive who was only concerned with the monthly payment and the term," says Rashad. "When leasing became mainstream, it was necessary to refine the policies, and any time the masses get hold of something, there are going to be abuses," he says, referring to the updated Regulation M law, which is enforced by the Consumer Leasing Act. To make sure you're not a victim, follow these guidelines:

* Determine your out-of-pocket expenses. Costs to consider when assessing your lease deal are: upfront, during and end-of-term payouts. The upfront costs include the first month's payment, a refundable security deposit, the negotiated price of the car, taxes, registration, licensing and other fees and charges. The monthly lease payment covers the depreciation fee and the lease charge plus taxes during the course of your agreement. At the end of the lease, you are liable for excessive wear-and-tear and mileage and some other charges. After an average of two to four years, Rashad says you have several leasing options: buy and keep it, buy and resell it at a profit, turn the car in and walk away, upgrade it (turn in a 1998 model and leave with a 2000 model), get a lease extension for up to six months, refinance the balance or release the balance.

* Be prepared to negotiate. Contrary to popular belief, "you can and should negotiate the cost [of a car lease] because it will affect your bottom line figures," says Reynolds.

According to the FTC, almost everything from the net capitalized cost to the acquisition fee, is negotiable. Try bargaining on the upfront charges, the lease term, monthly payments, end-of-lease fees and charges, and a buying option. Also, most leases limit the number of miles you can drive, typically to 12,000 to 15,000 per year. But can you pay or negotiate for more if you know you will exceed the limit. This is really important because it can cost you 10 cents to 25 cents for each mile you go over at lease end. "Most customers should know that the best deals come along every day," says O'Loughlin. "So keep your options open." Once you negotiate a deal you like, take it to other lessors for comparison shopping.

* Make the assessment. "Leasing is not for everyone. However, in today's marketplace, it's designed for the first-and last-time buyer because they have little or no money to put into the car," says Rashad. Compare lease expenses to purchasing costs. If a car is purchased and paid for in full, the consumer pays the purchase price plus taxes, registration, licensing fees and other charges. If, instead of paying in full, the car is financed, the initial outlay would be considerably less, but you'd pay more over the long run in finance charges. "The reason why rich folks lease so often is because they can do more with their money than put it into a car. A car is a depreciating asset, so they put their money into appreciating assets that go up daily," explains Rashad.

* Know your rights. "There is no three-day right of recision whether you buy or lease, except in New Jersey," says O'Loughlin. That means the dealer (except in New Jersey) is not required to take the car back within three days if you reconsider. "If you sign a document that you don't understand, you do so at your own peril." Therefore, before you sign, have the dealer fill out the lease cost information form in Look Before You Lease, an FTC publication (www.ftc.gov/bcp/coline/pubs/alerts/ lease.htm).

Also, take a copy of the disclosure agreement home with you and review the terms, costs and conditions. Then ask yourself these questions: Do all of the numbers add up? Does your verbal agreement match the costs outlined in the contract? Do you understand everything in the contract and the disclosure agreement? If not, don't sign.

* Get satisfaction. If, after the lease signing, you find errors in the contract, contact the general manager or sales manager of the dealership where you got the vehicle. Otherwise, O'Loughlin recommends contacting your state's attorney general's office, Department of Motor Vehicles, the Federal Trade Commission (877-FTC-HELP; www.ftc.gov), Better Business Bureau (www.bbb.org) or a private attorney. But Reynolds says it's best to "understand the deal before you sign."

For more information on leasing, read "The Lowdown on Leasing" at www.blackenterprise.com.

Leasing: pros & cons

* Monthly payments are lower because you only pay for the amount of time you use the car plus interest.

* You pay for excessive wear and tear as defined by the lessor. Don't think a ding or a scratch is minor. At lease end, you may have to pay for those repairs.

* You can drive a new car every two to four years.

* The car must come back to the lessor in its original condition or you pay to restore it. You may want a better-quality stereo system, for example, but you will pay to replace the old one at lease end.

* Since the monthly payments are lower, you can get more car for your money.

* The lessor owns the car, unless the lessee options to buy it at the end-of-term or refinances the remaining amount.

* Most leases require little or no down payment.

* The lessee still has to pay for maintenance, traffic tickets and insurance. Some consumers are under the false impression that the leasing company pays for insurance.

* When the lease ends, you can simply pay any charges, turn the car in and walk away.

* You usually have to carry the highest amount of car insurance.

Leasing Lingo

* Acquisition or bank fee--similar to bank points in a mortgage, this fee is paid up front to lessor. Varies as much as $1,400. Capitalized cost--the price of the car during the term of the lease plus registration fees, license, taxes and other fees.

* Capitalized net cost--the purchase price of the car after all down payments are made.

* Capitalized cost reduction--similar to a down payment, this fee may include trade-in, incentives, rebates, etc.

* Closed-end lease--one in which, when the car is returned at the end of the lease the consumer can "walk away." The lessee is usually still responsible for excess mileage, wear and tear and disposition.

* Disposition fee--back end fees for selling expenses or disposing of the car. The average fee is $250 to $450.

* Gap insurance--the difference between what you owe and what the car is worth if it's stolen or totaled in an accident. It covers the balance after insurance pays off.

* Open-end lease--one in which the difference between the value stated in the contract and the lessor's appraised value at the end of the lease must be paid by the consumer. Therefore, this type of lease is not to your advantage.

* Residual value--resale value of a car at lease end, as determined by the lessor.