The friendly letter arrives from the leasing company with the news you've been expecting. Your auto lease is coming to an end in a few months.
Before you start dreaming of the next car, however, it's time to get out the magnifying glass and reread that lease agreement, because there are important decisions to be made. Make the wrong ones and the lease might snag you in the pocketbook on your way out the door. The right moves -- some of which the dealer was unlikely to mention -- could actually give you an unexpected bonus.
Start by deciding, 45 to 60 days before the lease ends, what you want to do with the car. You have five options available to you if, like the vast majority of lessees, you have a closed-end lease. According to Michael Kranitz, author of Look Before You Lease: Secrets to Smart Vehicle Leasing, you can:
Return the car to the lessor and walk away from it. Not surprisingly, this is called a "walk-away."
Buy the car, usually for the amount of the "residual," or buyout, value set in the lease.
Extend the lease for a limited amount of time, usually at the same monthly rate.
Re-lease it, via a used-car lease, or
Trade your leased vehicle in on a new lease. If the car is worth more than what you would have to pay the leasing company to buy it, it shouldn't cost you anything to acquire it and trade it in on a new vehicle. In theory, this shouldn't happen because leases are designed to yield zero equity at lease-end, but with certain vehicles, you could wind up making money on the deal.
Decided? Good. If you're turning in the car, it's time to get it ready to go.
Check your mileage The first thing to check as soon as you get your inspection letter is your mileage. If it looks like you're going to go over your mileage limit, try to minimize the vehicle's use. Trade cars with your spouse, your parents -- anybody you trust who drives a shorter distance than you do.
"Mileage is a big deal," says W. James Bragg, founder and CEO of Fighting Chance, an information service for new vehicle shoppers and author of the Car Buyer's and Leaser's Negotiating Bible. "I had a college roommate who went on to be the CEO of a company. He leased a Lexus for 45,000 miles and had 90,000. He had to write a check for $9,000 to give his Lexus back. A lot of dealers will say, 'Don't worry about it, we'll roll it into the next cap cost,' so you wind up paying interest on your excess mileage."
Here's some potentially bad news. When you reread your lease, you may find that you've volunteered to pay an extra charge for the privilege of giving them back the car -- the disposal fee. About half of the carmakers charge them, and the price can be stiff -- $350 with BMW and Land Rover leases, for example.
The amount should be specified in the lease, sometimes with a different name, such as "turn-in fee." Leases signed after Jan. 1, 1998, have to spell out the fee on the front page of the contract, but you might have to get out a magnifying glass on older leases. It sometimes is waived if the customer signs up for a new lease.
If you've volunteered to pay it, all you can do is make sure you don't get overcharged.
When you get your letter, you'll receive instructions on how to bring your car in for an inspection, unless you're going to buy the car, in which case there's no inspection. It may take place at the originating dealership, a nearby dealership or an independent inspection firm. The inspector will check the car's interior, exterior and mechanical condition.
The leasing company expects you to return the car with "normal wear and tear," but each one has its own standards.
Ford, for example, tells customers that "normal" includes dings, minor dents, small scratches, stone chips in the paint finish and reduced tread on the tires. It defines excessive wear to include such items as broken or missing parts, dented body panels or trim, damaged fabric, cracked or broken glass, poor quality repairs, unsightly alterations, tire or wheel damage or less than 1/8-inch tread, or mechanical or electrical malfunctions.
Before the inspection takes place, you can help yourself with a minimal investment by having the car professionally cleaned, waxed, vacuumed and detailed.
Tire wear is particularly important. Don't bring the car in with less than one-eighth of an inch of tread, or with mismatched tires. If you do, you'll find yourself charged for a new set of tires.
Once the inspection takes place, you usually have few methods besides the courts to dispute its findings. New York is an exception -- a state law went into effect in 1995 giving customers the right to a second appraisal, if they pay for it.
Outside the Empire State, lessees can still lessen the bite of damage charges.
First, don't tell the dealership to just take the cost out of your security deposit. You're responsible for the repairs, but you don't have to pay the dealership's service department prices. Shop for repairs yourself and save.
Also, check to see if you have coverage remaining on your warranty; some mechanical repairs still may be covered.
The contract may contain strict language about damage, but it doesn't always mean the inspection will be white-gloved and nitpicky.
"Lease contracts written in the last couple of years are much more specific about what 'normal wear and tear' means, although the definitions tend to be fairly strict in the leasing company's favor," says Al Hearn, author of Automobile Leasing: The Art of the Deal. "Even if the contract is strict, the inspection can be loose and liberal. I personally have never had a problem even though I've returned cars with cracked windshields, worn tires, dents, dings and scrapes."
It all becomes a moot point if you decide to buy the car. Then, there's no inspection, no fees for extra mileage or excess wear and tear, no disposition fee and you get your deposit back.
When does it make sense to buy a car you've leased for the last two to three years? Here are some questions to ask yourself, courtesy of Remar Sutton, president of the Consumer Task Force for Automotive Issues:
Do you like the car?
Has it generally done what you've asked it to do with a minimum of unexpected cost and repair? Don't go on history alone. Take the car to your mechanic, just like any other used car you're considering buying.
Will it still fit your future needs? If you're driving a convertible and planning a move to Rochester, N.Y., probably not. If you're the proud parent of a budding tuba virtuoso and driving a minivan, then it's probably going to continue to be a good fit for you.
What is the lease-end buying price? You'll find the figure in the lease's small print. This buyout price is often called the residual value.
"Auto retailing is an extremely local business," Bragg says. "A guy in Oregon has a pickup. Everybody drives one, so there's a glut of them and there's a depressed value. You drive down the road 80 miles to the big city and you can get $2,000 more."
Bragg suggested picking up a copy of a regional auto classified magazine or walking dealership lots when they're closed.
"The average new-car dealer sells as many used as new," he says. "See what they're asking, then mentally adjust that down 10 percent to 15 percent for realistic pricing."
Sutton recommends taking the car to three used-car operations and tell them you're thinking about selling -- not trading -- and ask what they'll offer you for your old car in cash. That's the wholesale value. If the amount the dealer is willing to pay you is more than your lease says you can buy the car for, it's a good deal for you.
If your leased car has performed well, meets your needs and you can buy it for no more than $1,000 over wholesale value, Sutton says that's a very smart buy.
What if the residual is higher than the actual value, but you still want the car? Your dealership or leasing company won't offer this information, but you can try to negotiate a better price.
"You'll find that banks and captive finance companies have an incentive to keep you in the car," Kranitz says. "They don't want it back. There's a glut of off-lease vehicles and they'll lose money on it every which way to Sunday.
"Say the market value is $13,000 and the residual value in the lease to buy is $16,000. What you could do is call the bank and say, 'Look guys, you're going to eat $3,000. We'll split the difference.' "
Sound improbable? According to the Consumer Bankers Association's 2001 Automobile Finance Study, 95 percent of the leased vehicles returned to lessors in 2000 were sold at a loss, to the average tune of $2,342.
You can also come out ahead under the opposite scenario, in which the market value is well above the residual value. This is more likely if you've stayed well below your mileage cap, or the car has become coveted in the market.
It's unlikely the dealer has mentioned this, but you can resell the car yourself while it's under lease.
"You may want to think about reselling it," Kranitz says. "If you put it in the paper, you could make more money than the payoff. If you've leased for 15,000 miles a year and only driven it 10,000 miles, it has a value to the dealership and the consumer market. You can use the dealer's retail price on those cars on what the market will bear. Most people don't lease so they can play the used-car game, but it's there."
The offer had better be a great one: Many leases carry early termination penalties in addition to disposition fees, so you'll have to figure them in when calculating if you'll get a profit.
The other two options you have on the table are to extend the lease short-term, or re-lease your used car. Extending the lease makes sense, Bragg says, if you're at a point of uncertainty in your life. Maybe you're getting transferred, anticipating starting a family or you know you'll be getting a bonus in the next month or two.
"Will they extend it a couple of months? I think leasing companies will," Bragg says. "No wonder. You're making level payments based on the depreciation for the first three years. They're making more profit on your payment."
The final option is to re-lease your car. That should result in a considerably lower residual, a lower capitalized cost, less depreciation and a lower payment.
"You have to decide if leasing still makes sense if you like the car, and you think it's likely to hold up for another three years," Bragg says.