Industry Research

Looking to Keep Your Fleet Fresh? Leasing May Be For You

Posted on January 23, 2012 by John Greene

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Veteran Massachusetts operator John Greene has gained vast experience in cutting prime lease deals from his more than 1,000 fleet vehicle leases.
Veteran Massachusetts operator John Greene has gained vast experience in cutting prime lease deals from his more than 1,000 fleet vehicle leases.

In this troubled economy, keeping the best available vehicles on the road can be a challenge. When the Lincoln Town Car is replaced by a MKZ or MKT or a Cadillac XTS, will you retain that competitive advantage by having your clients step into a brand new (or reasonably new) vehicle every two years?

The opportunity exists with leasing, which affords the option to get a new vehicle every couple of years. There are other advantages, such as omitting the hassle of titles and registrations. There could possibly be tax breaks and benefits centered on the down payment and the overall terms of the lease, depending on your company’s tax structure. With leasing, your monthly payments can be used on your taxes, so you have a clear-cut picture each tax year of what your deduction will be. But with financing, everything is tied into the depreciation at the end of the term.

One leasing company executive said, “If your accountant says it’s in the best interest of your company to lease vehicles, and you’re planning to turn over your assets every two to three years, then a lease is most likely what you will need.”

Pros & cons
Like most choices, there are pros and cons to every situation. If there’s a “con” to leasing, it’s that leasing is a fancy word for “renting.” You don’t own the vehicle and you are never building equity in your purchase. But the ”pro” is you are only paying for the portion you use.
Another “con” is that if you are not careful and don’t “do the due” (as in due diligence), you are going to get socked at the end of the lease for mileage and excessive wear and tear. Think of every mile you go over your limit, or every time you pick up a “ding,” as a withdrawal from your bank account. So be sure to set a proper residual so it is a “win-win” for you and the leasing company at the end of the term.

Key steps

  • Due diligence is important. Start by maintaining good relationships with car dealers. Look the vehicles over carefully. Are the miles on the odometer hard miles or soft miles? Was it driven by a little old lady on Sundays or a frustrated NASCAR driver every weekend? Be sure to visit limousine trade shows, where you’ll often see what’s new all in one spot.
  • Good rates. Once you see the vehicle(s) you want, find a leasing company you feel comfortable with and negotiate a good interest rate. Be aware of all back-end charges and what the residual will be at the end of the lease, should you choose to buy the car. I recommend a 24-month lease with unlimited mileage, with a set residual somewhere in the $5,000-$7,000 range.
  • Mileage is a key and a killer. If you limit the mileage you put on a lease in exchange for a lower monthly payment, you could pay dearly. Your company’s success is based on putting mileage on your vehicles; it means you are creating revenue. It would not be a good idea to have to turn some of that success into an extra lump sum payment to the leasing company at the end of the term. Work out the payment so you get unlimited mileage. But don’t take on a payment you can’t handle. If you get in over your head, it can be very costly to break the lease early. “The penalties can be steep and the early termination of a lease will require you to pay the remaining payments as a penalty,” explains Don Coolbaugh, vice president of sales for Advantage Funding, Inc. “If you simply return the vehicle, it is likely the leasing company will report a voluntary surrender to the credit bureau. If you need to get out of the lease early, it’s a good practice to contact the leasing company and see if you can negotiate a settlement. Most good clients with good pay histories will not have a problem, especially if they are reacquiring another piece of equipment called a payoff and replace.”
  • Length of the lease is important. As I mentioned previously, I like to keep it capped at 24 months, particularly for sedans. However, with stretch limos and vans, I will go 36 months, and up to 48 months for mini-coaches because they are used less often. There’s also an advantage to working out the timing of the lease so you take possession of the vehicle a few days into a month, so that when a payment is due on the first of the following month, you’ve already had the vehicle out on the road. And speaking of payments, if a leasing company asks for first and last month’s payment, a security deposit, credit check fee, high excessive mileage rates, processing fees, then move on to the next candidate. It’s a car, not a house.

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