Thursday, July 31, 2008

No More Car Leasing

As the Big Cajun Man at Canadian Personal Finance pointed out, car companies are shying away from leasing cars. This may seem puzzling, but will make sense after looking at the true nature of car leases.

The term “car lease” was great marketing. It gives the illusion that the dealership takes the risk, and you just rent the car for a while and get a new one when it suits you. The truth is that with a car lease you take much the same risks as if you buy the car.

If something happens during the term of a car lease that makes the car worth less than expected at the end of the lease, you’re on the hook and will have to make up the difference. The best way to think of it is that you own the car, but owe a lump sum at the end of the lease. If the car happens to be worth as much as this lump sum owed, then you’re okay. If not, dig into your wallet.

When leasing a car you have lower payments than if you took out a loan, but this just means that you’re paying it off more slowly. In fact, during the early part of the lease, often you aren’t even keeping up with the depreciation on the car.

So, for the first part of the lease, you may actually owe more than the car is worth. This is a risk for the car company. With the recent credit crunch, car companies are smart to avoid such risks. So, it’s no wonder that some car companies don’t want to lease cars these days.

3 comments:

  1. "If something happens during the term of a car lease that makes the car worth less than expected at the end of the lease, you’re on the hook and will have to make up the difference."

    If something happens to that particular car to lower its resale value, then you're on the hook (extra km, damage, etc.). But if the whole class of vehicles suffers lower resale values due to, say, a recall or high gas prices, then that's something the leasing company is on the hook for -- and it's just about the only risk they take leasing, AFAIK.

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  2. Thanks for the link, leasing has always been a shell game, now the car company's are feeling the pinch, I am happier.

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  3. Potato: Thanks for the clarification. I agree that the leasing company does take on some risk, but the situation is much different from renting a house where as long as the renter doesn't do anything obviously reckless, the house owner takes all the risk of having to make repairs, etc.

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