We all have a friend or several who had a bad experience leasing. It happens constantly. They go to a dealership looking for a vehicle. They consider leasing at some point. They are given the choice of $800 per month for the vehicle they want if they buy. The term is 60 months or more. They are given an option to lease the same vehicle for $550 for a shorter term! BINGO. They stop thinking right there. The mileage isn’t a factor in their decision-making process, nor is the mileage charge, rigidity of the lease, or required down payment. At lease end, they are over mileage by 20,000 miles because their lease only allowed 10,000 miles per year. Those miles are charged at twenty-five cents per mile and there is a $4,500 bill plus “damage” charges. They are mad at leasing and swear they’ll never do it again.
Leasing isn’t wrong, but it was used incorrectly. It’s that simple. It’s like buying a gallon bucket and trying to transport three gallons at a time. It’s a mess!
The moral of the story is leasing isn’t bad. Leases can be written badly.
If the lease is set up properly from the start, they can be simple, flexible, and achieve all the stated goals.
Understand How You Will Use The Vehicle – Miles and Damage
Leases are based on use: the vehicles expected depreciation over a period of time. Defining how you will use your fleet vehicles is a vital first step in putting together a well-written lease that meets your goals and objectives and avoids surprises. Do your vans and trucks get a lot of wear and tear on the job? How many miles do you put on your vehicles annually?
Both open and closed-end fleet leases can be configured with high mileage. Dealer/OEM leases cannot be configured for high miles or damage. The latter are consumer leases, not designed for fleets. Business leases (another term for open-end leases) have no mileage charges or damage charges. The lessee bears the risk for the value of the vehicle at the end of the lease and has the benefit of the equity built up during the lease. Business leases can be written for any mileage annually, including up to and exceeding 100,000 miles per year.
Pay Attention To More Than The Monthly Payment
While having lower monthly payments and less cash tied up in an asset is one of the biggest benefits of leasing, it’s important to consider more than the monthly payment. Other key factors to a well-written lease include cost, residual value, term, and tax savings.
Cost: Are you maximizing fleet rebates?
There are three ways to acquire a vehicle in terms of price: retail, fleet, and large fleet rebates. Vehicles can then be purchased out-of-stock or factory ordered. Lower prices are achieved by factory ordering vehicles. A fleet of 15 vehicles qualifies for fleet rebate status with most OEM’s and much larger fleets qualify for large fleet rebates.
Residual Value: Does the residual value consider how you plan to use the vehicle?
The residual value is estimated at the beginning of the lease and takes anticipated mileage and wear and tear over the term of the lease into account when setting the residual value. If the value at the end of the lease is higher than the estimate, the equity built up is paid to the lessee or used as a trade-in value on a subsequent lease. If the value is less than the estimate, the lessee is billed for the difference.
Tax: What are the income and sales tax savings with each option?
In 43 states, sales tax is only paid on the portion of the vehicle used, not the vehicle’s residual value. If you lease an $80,000 truck with a $30,000 residual value, for example, your firm saves sales tax on $30,000. It’s only paid when/if you decide to extend or buy the vehicle.
Term Length
How often do you typically replace your fleet vehicles? The average term of a business lease is three to five years. When comparing leases, make sure you are making an apples to apples comparison and the length of the lease is the same.
Understand the Type of Lease You are Getting into
No one likes surprises. The type of lease you sign determines what happens when you turn in the vehicle at the end of the lease or if you turn in the vehicle early. If you understand the type of lease and make the right choice to suit your use, you avoid surprises when you turn in the vehicles.
Open-Ended Leases
An open-end lease is a true fleet lease; it does not have mileage or damage charges and is naturally flexible. The residual value is estimated at the beginning, and the lease takes anticipated mileage and “wear and tear” into account.
At the end of the lease, you are responsible for the vehicle’s value – similar to ownership. If the vehicle’s value at the end is higher than the original estimate, the equity built up is either paid out to you or used as a trade-in value on a subsequent lease. If the value is less than the estimate—such as when there is unexpectedly high mileage or damage—you will be billed for the difference. No penalties or arbitrary mileage charges or damage bills are computed.
Closed-End Leases
A closed-end lease is a guaranteed fixed cost over a predetermined term. With this type of lease, there is a responsibility for maintaining a mileage limit; excess mileage and wear and tear will be billed. At the beginning of the agreement, you should decide on your terms, making sure that you choose a lease term that matches your vehicle usage and cash flow needs. Your lease can always be extended, but ending a closed-end lease early will cost you. All future lease payments are collected in the event a closed-end lease is terminated early, making them less flexible. Closed leases can be written for between 2,000 – 100,000 miles annually.
Fleet management companies specialize in business leasing and have more lease options than dealers/OEMs.
Don’t Get Burned by Poorly Written Leases
Work with a qualified fleet management company, such as Doering Fleet Management, that specializes in business leasing and offers a wide range of lease options. Leasing for fleets exists and is a much more flexible, affordable alternative for businesses than consumer leasing: no mileage limits, no damage charges, and no restrictive lease terms. The tax benefits are greater and more consistent than owning plus the lower payments contribute to improved monthly cash flow. It’s a win-win.
The Doering Fleet Management team is here to help you through the process, explain the options, and offer expert advice once we know your firm’s unique goals.
