|
 |
Pre-paid Car Lease. Single-Payment Lease. Smart or Not? |
||||
|
|
Prepaid, or single-payment car leases are often an option for people who have available cash. It promises to eliminate payments and save money. Such leases are sometimes called one-pay leases. However, is it smart to pay everything up front to avoid monthly payments? Are there drawbacks? Do you actually save money? Not quite
what is seems At first glance, it appears that pre-paying a car lease with cash might also eliminate finance charges, or interest. However, this is not quite true. Leasing works a little differently, as we will see below. Some people also believe they can avoid having a lease appear as a new debt obligation on their credit report by "paying off" the lease up front. This is not quite true either. Furthermore, pre-paying a lease defeats one of the primary benefits of leasing — to minimize use of hard cash so that the cash can be used for other, more productive, purposes. However, before we draw conclusions about whether prepaid leases are smart, let's take a closer look at how a one-payment lease works and what benefits it may or may not provide. How a one-pay
car lease works Let's say it in a little different way. When you "pay off" a lease you're not really totally paying it off. You pay off everything except the lease-end return value (residual value). Finance charges still apply to that amount. You pre-pay those finance charges in your single up front cash payment. You pay off the remainder of your lease when you return the vehicle. Even though you don't make monthly payments, there are still finance charges on the value of the vehicle while you "borrow" that vehicle during your lease. What you save
with a single-pay car lease Actually, the way that some lease companies calculate your single payment (simply as the sum of all monthly payments, including interest), you save nothing on finance charges, since interest is included in each monthly payment. This is obviously to the lease company's advantage and would be unnoticed by most leasing consumers. So, if you are considering a prepaid car lease, ask your lease company or dealer how they compute it and if you save money on some of the interest. Next, you can save some sales tax when pre-paying a lease. In most states, sales tax is added to monthly lease payments. But monthly payments include both a depreciation payment and interest. It may not seem fair but you pay sales tax on that interest. If you eliminate that interest by pre-paying your lease, you avoid paying sales tax on it. You still pay sales
tax on the depreciation amount in your single payment, however, but the
total sales tax paid is less than if you made monthly payments. Pre-paying a lease
is not the same as pre-paying a loan or rental. A possible
disadvantage of pre-paid car leasing This is the same risk you would have if you paid cash for a purchased car. Contrast the above total-loss situation with a normal monthly payment lease. The lease company (in most leases) picks up financial responsibility for the difference between what you still owe on the lease and your insurance settlement. This is known as "gap" coverage and is automatically included in most leases. You would lose nothing except your insurance deductible. This is one of the benefits of leasing with little or no down payment. Gap coverage, even
if included in your pre-paid lease, provides no benefit to you. It does
not cover your cash losses. This risk is greatest in the early months
of a pre-paid lease, and lessens as the lease nears its completion.
Comments and questions should be directed
to
. |
Return
to