HE PHOS AND CONS OF LEASING

Traditionally, buying a car
through a loan or outright with
cash, created a sense of ownership
and equity. Whether you obtained
the car with a bank loan or put up
all the money from Day 1, there
was a comforting feeling of having
made a well-earned investment.

BMWs CFO Petra Kerp

But leasing has changed all
that. With about four out of 10 new
vehicles being leased today ~ and
the ratio is rapidly increasing to five
out of 10 ~ the notion of using a
car to build equity has beer: laid to
resi,

“Why treat a car as an equity
investment? It makes no sense,”
says Michael Lapointe, director of
corporate development for
Commceorp Financial Services Inc.
‘of Burlington, Ont. “A car has a
value in a utility sense and you
should pay for what you use.
However, if you have some cash,

When BMW Canada Inc., the
Whitby, Ont.-based subsidiary of
Germany's BMW AG, unveils its
own leasing and financing division
this month, it will accomplish two
objectives with one stroke.

First, it will harmonize its
activities with other BMW
subsidiaries around the world.

Second, it will demonstrate to
the car-buying public, which has
recently been emphatically shifting
towards leasing vehicles, that BMW
can play a vital educational role in
making consumers aware of
leasing's subtleties.

From a global perspective, the
creation of BMW Financial
Services (Canada) Inc., means that
BMW Canada will be active in the
same way as its sister companies

Satay

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invest it in something that produces
a retum — not something that will
depreciate.”

Of course, leasing isn't for
everyone. “For some people that
sense of ownership is an important
consideration,” says Lapuinte,
whose firm is heavily involved in
commercial leasing and is
investigating going into the retail
side of vehicle leasing. “But just
because you lease a car doesn't
mean you should forgo a sense of
ownership. On many leases, you
have a contractual right to
purchase the vehicle. It can be the
best of both worlds.”

Still, consumers must be
aware that not all leases are
created equal. Like other
commercial agreements, leases
come with a variety of terms and
conditions. And consumers must
be careful nct to end up with
something financially onerous,

That's why Lapointe advises
people to understand the contract's
terms before signing and, in
particular, ask the lessors what their
expiry options are and the
conditions consumers must satisfy
at the conclusion of the lease,

“The pitfall of leasing is
thinking that all leases are alike and
not understanding what you're
gatting into,” he cautions. “if you
understand the lease structure, you
can properly assess its merits.”

While there are many types of
Jeases offered, the two most
common are “open-end” and
“closed-end.”

in an open-end lease, also
known as a “finance” or “equity”
lease, the lessee, or individual

elsewhere.

“Although the parent company
has large financial services
divisions in all major markets of the
world, Canada is actually one of
the last markets to introduce such a
division,” explains Edward
Robinson, BMW Canada's
president and CEO. “it’s a very
successful way of bringing more
value to new customers.”

Naturally BMW Canada would
like to accomplish the same thing.
After closely examining the
burgeoning leasing side of the auto
industry, i's determined to invite
consumers to make comparisons
with it and other manufacturers.

“To take one example, the
consumer interested in leasing
should not only fook at the monthly

leasing the vehicle, makes rnontiily
payments based on an estimate of
what the vehicle will be worth at the
end of the lease. If the vehicle is
worth less than its estimated value,
the consumer pays the difference.
In short, the consumer assumes
the risk. Typically, these leases
usually cost less per month than
closed-end leases.

«Soi

COnSUIMErS
must be aware
that not all
leases are
created equai.”

In closed-end leases, which
are considerably more common,
and may also be called “walk
away,” or “guaranteed trade-in”
leases, the lessor, or leasing
company, assumes the risk for the
value of the car at the end of the:
lease. The lessee, or consumer,
just returns the vehicle to the
feasing company at the end of the
term, which may vary from 24 to 60
months.

He's also responsible for any
damage, unreasonable wear and
tear or excessive use measured in

lease cost, but the manufacturer's
suggested retail price (MSRP),”
says Robinson.

He's referring to the practice of
some competing manufacturers
that use leasing or retail financing
to present a different pricing
structure than what may actually be
in place. in other cases, he adds,
there are hidcen charges — such as
punitively high early termination
fees — to which unwitting
consumers fall victim.

BMW wants to eliminate these
potential irritants and do more as
wall. ‘We want to offer the
consumer across Canada a
consistent lease product,” says
Petra Kerp, who is both president of
the newly formed BMW Financia!
Services (Canada) Inc., and vice

kilometres. Usually, lessees can
arrange to pay a jee in advance for
the use of any kilometres above an
agreed upon limit.

A “full maintenance” lease is
another type of lease. In this case,
the consumer's payments include
the cost of full maintenance during
the term of the lease. This type of
lease is most common with
companies that operate large
vehicle fleets.

There's also a type of lease
contract known as the “fair market
value” lease. In this case, the
amount of the lessee's aption to
purchase is based on the vehicle's
market value as determined by an
auto industry reference book
known as the Black Book.

if the actual vaiue of the car is
less than the estimated value that
was established at the beginning of
the lease, then the consumer pays
the difference if he intends to buy
the car, or he can just walk away

-from the contract. But if the

wholesale value is more than the
predetermined estimated value, the
consumer can either buy the
vehicle at the latter price or sell it
privately and pocket the difference.

In-general, there are a number
of features that make leasing more
attractive than loan financing.

For a start, monthly payments
are lower. “In leasing you only pay
for the part of the car that you use,”
says Petra Kerp, president of BMW
Financial Services (Canada) Inc., a
Whitby, Ont.-based division of
BMW AG of Germany that will
handle all leasirig for the
manufacturer,

Essentially, the consumer

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at es uf

Commcorps Michael Lapointe
makes payments based on the
difference between what the
vehicle costs today and its
estimated value in the future,
othemise known as the residuat
value. Typically, on a two-year
lease, the residual value is.
approximately 50% of the car's
criginat price, which means a
consumer is making payments on
about half of the car's value.
Another lease advantage is
that the consumer pays less goods
and service tax and provincial
sales tax because the taxes are
added to the monthly lease
payments on a pay-as-you-go
basis. The tax bill is higher with a
loan because the consumer is
financing the entire vehicle.
Altematively, if a consumer
wants to get more bang for his

Continued on page 38

president, finance and
administration for BMW Canada.

Without a leasing subsidiary,
however, it was very difficult, for
instance, for BMW to offer dealers
and consumeis in Toronto the
same kind of ieasing products
available in Vancouver, or to have a
consistent product for both Calgary
and Montreal. That's because each
province has its own set of laws.

But since the creation of BMW
Financial Services last winter, the
firm now has an organization
licensed to operate in each
jurisdiction.

This isn't to say that BMW is
new to leasing. Indeed, about 35%
of its vehicles were leased last year.
But the company has long relied on

Continued on page 38