ACVL Corrects Consumer Reports Advice on Leasing

Bernard de Souza
Customer Satisfaction Chairman, ACVL
615/467-1900

Larkspur, CALIFORNIA, February 27, 2001. In its January 2001 issue, Consumer Reports says: "Unless you can claim tax deductions for the business use of an automobile, leasing offers no inherent financial advantages over buying." ¹

"That's not the case," says Randy Brown, ACVL President. "The total costs of leasing a vehicle for a fixed period are generally LESS than for financing because of: (1) savings on depreciation; (2) gap coverage included in most leases; (3) reduced sales/use tax in most states; and (4) the higher investment rate or debt reduction rate for which your monthly payment savings can be used."²   Consider just the depreciation savings. In 1999, lessors sold the average returned off-lease vehicle for $2,592 LESS than the residual value. Thus, consumers SAVED at least $2,592 in depreciation costs compared to financing.³   By comparison, if the consumer owned the vehicle with a 14,000 loan balance and traded it, he or she would owe the full loan deficiency of $2,592.

The $2,592 depreciation savings by leasing assumes that the consumer could get the same price for his or her trade-in as the leasing company could get in professionally reconditioning and selling the vehicle at auction with dozens of dealers from a radius of hundreds of miles bidding on the vehicle. In fact, most consumers are unlikely to get the full auction value for their trade-in.

Consumer Reports also asserts: "A lease comes with lots of limitations on how you can use your new vehicle. . . Will one of your children begin driving over the coming few years? If so, leasing may not be the right choice."

"That's a misconception," responds Bernard de Souza, chairman of the ACVL Customer Satisfaction Committee. "There are NO restrictions among major lessors for children driving leased vehicles." Many consumers also misconstrue the mileage and excess wear standards of leasing. In order to provide a guaranteed trade-in value and protect the consumer from excess depreciation, the lessor has to project the end-of-term mileage and condition of the vehicle. If the consumer doesn't meet the lease standards, there is a charge that reflects the reduced value of the vehicle (if the vehicle is returned). But if the consumer had purchased the vehicle and traded it with the additional wear or mileage, the trade-in would also be worth less. More importantly, the lease's guaranteed value protection (worth $2,592 on average for leases ending in 1999) doesn't end because of a $300 excess mileage or excess wear charge. The consumer still receives the savings from excess depreciation even though he or she has to pay the cost of returning the vehicle to the expected condition.

Consumer Reports says: "It takes a sharp-eyed skeptic to deconstruct a lease advertisement."

"Actually, lease ads do have consistent information," responds Randy Brown. "Lease advertising must follow federal requirements and therefore includes the same basic information. Most national advertisements contain additional information. We've reviewed dozens of lease advertisements and created an exhaustive list of all of the different terms and phrases that a consumer is likely to see in advertising. We've posted the list in our web site with an explanation of what each phrase means, as well as a definition for any specific leasing terms. With this information, consumers can fully understand any lease ad."

Consumer Reports provides a great service in trying to explain leasing to consumers and compare it to financing. However, the ACVL web site has much more complete and accurate information on leasing and financing, including a detailed commentary on many other leasing concerns raised by Consumer Reports. To get the complete background on just about any leasing question, consumers should visit ACVL.com. See the Consumer Reports Commentary.

About ACVL. The ACVL, founded in 1993, is an association of the nation's largest vehicle lessors. Based in Larkspur, California, the ACVL is a national trade association for the largest manufacturer and import distributor captive finance companies, banks and independent leasing companies. Its primary goals include increasing consumer understanding of lease benefits and responsibilities through improved disclosure. Further information about the ACVL and consumer vehicle leasing may be found on the Association's web site: ACVL.com. The association has been very active in many areas of consumer lease education. The ACVL has contributed significantly to the Federal Reserve Board web site on lease education (bog.frb.fed.us/pubs/leasing) and has often been asked to comment on both federal and state legislation designed to improve consumer disclosures on leases.

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1."It's the lease you can do," Consumer Reports, January 2001.

2.Leasing offers a lower monthly payment than financing so the consumer has the opportunity to use the savings in the monthly payment to pay down a higher rate credit card debt or make an investment with a higher return such as a company retirement plan that has a 25% or 50% company match.

3.Thus the vehicle depreciated $2,592 more than what was originally projected when the lease began. For example, on a $25,000 vehicle with a residual value of $14,000, the expected depreciation is $11,000. In fact, the vehicle sold at auction for $11,408 ($2,592 less) - so it actually depreciated by $13,592 ($25,000 - $11,408) instead of by $11,000 ($25,000 - $14,000). It is important to remember that only the projected depreciation of the vehicle is paid over the term of the lease whereas a loan must be paid down to $0.