What is a "deficient value" policy on a Lease Car? Am I being ripped off?

Dear Money Mentor:

We were all excited to lease rather than buy our new car because the payments were going to be less than purchasing, but we were surprised by the "fine print" requirement to get an additional coverage for a "deficiency in value"? Are we being jerked around or what? We have always had car insurance but this is different. What gives?

Cautious and Frustrated at the dealership.

Dear Frustrated:

Ask the leasing agent to explain the requirement, and put the explanation in writing. This is the skinny. When you lease a car, normally with some type of deposit, you are generally immediately upside down financially on the obligation created to pay out the lease payments. Why?

Immediate depreciation. When you drive off the lot, you are probably taking a normal 20% or more immediate "hit" in value. This is the premium you pay whether you buy or lease a new car to be the first user/owner. That new car smell is expensive.

So, if you put down $2000 with your lease, and car is a $30,000 value, and your immediate book value depreciation is $6000, you are upside down if the car is stolen, or totaled, by the difference between the used book value, what your insurance company would normally pay, and what your remaining obligation is on the lease payments.

Your leasing agent is giving you good advice. You want to know, if the car is stolen, or totaled in an accident, that the insurance coverage will pay off the complete obligation. This requires an additional premium to cover this "deficiency in value" as you are asking someone else to assume this very real risk. Most banks will always include language in their auto purchase contracts that make you personally responsible if the auto insurance company will not pay off the remaining balance owed on your loan if the car is totaled or stolen. Lease companies want the same assurance.

One other point. You do understand that when you lease, you are generally not purchasing the car. You are truly renting. Here again, read the covenants you are signing. Consumer protection laws require disclosure of your economic risk, but the laws will not make you read your contract. You have to assume responsibility for your own due diligence.

Happy motoring.
DPC, Your Money Mento

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