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Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.
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May 15, 2003
"Big Changes in Car Leasing and Renting"
For years, the legal arrangement between the person who leases a
car and the leasing company that offers the lease was simple: Even though
the leasing company still owns the car, the person leasing it had liability
in case of accidents. But that legal relationship has been changing lately,
and it is causing a huge amount of upheaval in the leasing and car rental
business.
In October, a Rhode Island jury found that Chase Manhattan Bank owed $28
million in an accident case in which a leased car hurt someone. In New York,
Connecticut and Rhode Island, legislatures have passed “vicarious liability” laws which allow people who have been hurt by leased cars to sue
the leasing companies if they can’t recover money from the driver of the car
that hurt them, or the person who leased the car.
This is affecting both the market for leasing cars and car rental companies,
like Hertz and Avis, who also become liable if their renters have accidents.
The result of these new laws is that car finance companies are stopping all
leasing programs and replacing them with other kinds of financial
arrangements. Chase has stopped writing leases in Rhode Island, GMAC has
stopped leasing in New York, and Ford Credit says its going to stop
leasing in July. The leasing companies have tried to overturn these laws, but
the trial lawyers have stopped them from doing so.
Instead of leasing, car finance companies are offering "balloon
payment financing" in which, legally, the person buying the car has to make a
huge payment at the end of the financing term, similar to what would happen
if you have an expiring lease and you get to choose whether to buy
the car at the stated residual value. If you want to avoid the balloon
payment when it comes due, you can turn your car in for a “disposal fee” of
about $250. Or, you can pay the balloon or refinance the loan when it comes
due.
If you buy the car with a balloon payment, you have to pay sales tax, which
you don’t have to do when you lease the car, making it much more expensive
to buy with a balloon instead of lease.
In general, balloon payments are far worse deals for consumers than lease
because they are much more expensive, require larger down payments, and, of
course, you are now liable for damages if you hit someone. In many cases,
taking a 0% financing deal is better than a balloon payment in the
long run if you want to end up owning the car anyway. If you want someone to
run the numbers for you to see what is the best deal, you can always consult
an independent car-buying service like www.carq.com to help you figure it
out.
For More Financial Tips From Jordan Goodman
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