Leasing Information

From time to time we post articles and information on leasing and owning which we feel may be of value and interest. Your comments and questions are always welcome.

Mileage : the importance of properly estimating this key factor

Mileage: the importance of properly estimating this key factor
Many people have been led to believe that they can keep their lease payments low by avoiding an accurate estimate of the number of miles they are likely to drive during the term of the lease. True, their monthly payments would be lower if they estimated they would be driving normal miles (usually 15,000 miles per year), but estimating lower mileage when in fact they are high mileage drivers just delays the financial responsibility to the end of the lease. We have always felt it wiser to have a little higher monthly payment in order to avoid a big dollar hit at the end of the lease. If the leasing company or dealer is estimating the resale value of the vehicle at the end of the lease based on low or normal mileage use, and the vehicle comes back with high miles-which lowers it's resale value-the lessee with an open-end lease is responsible for that resale value deficiency. If they had a closed-end lease, then they would have to pay a mileage penalty-usually around 20 cents per excess mile.

As an example: if a four-year closed-end lease was written for 15,000 miles per year and the lessee actually drove 25,000 miles per year, an excess mileage charge of $8,000 plus tax would be due at lease termination. If the lease payment had contained an allowance for the correct mileage, that big lease end excess mileage penalty could have been avoided. Note that excess mileage depreciation is not unique to leasing. It reduces the value of the vehicle regardless of whether or not the vehicle is leased or purchased. (Excess mileage is perhaps the most misunderstood concept of the lease vs. buy decision.)

Resale (Residual) Value: the effect of significant collision damage on vehicle value

Since a vehicle, even with quality repairs, is never really quite the same after a collision, a precedent setting lawsuit may force insurance companies to pay on the diminished value of a car after an accident. A lawsuit in Georgia forced State Farm Insurance to pay on a vehicle's loss in value (diminished value) after an accident regardless of the quality of repair. Following the verdict, State Farm, the nations largest insurer, agreed to assess all future claims for diminished value. This case now forms the basis for dozens of other cases and should set a precedent for recognizing diminished value nationally. No matter how good a quality repair job is done on a damaged vehicle, it may very well be worth less in resale value than was originally estimated when the lease was written.

That could result in a deficiency that the lessee would have to pay. Any dealer worth their salt can spot evidence of significant collision repairs and will usually lower their bid price on the vehicle accordingly. If you have the misfortune to have a vehicle accident, then you will want to keep in mind the possible diminished value of the vehicle when negotiating with your insurance company for repair. Better yet, call your auto insurance agent and ask whether your policy will cover your vehicle for diminished value in case of an accident. NOTE: diminished value because of a collision repair will affect the value of a vehicle whether leased or owned so vehicle owners should have the same concerns as lessees regarding this subject!