They Call It a “Lease” - It May Be a Balloon Contract

What passes as a car lease today in Israel many times is not a lease at all; it’s a residual note or balloon financing plan.  To be clear, we have these types of plans too and some of our customers opt for them; we call it LAP (lease alternative purchase).  There are indeed circumstances where this is the best option.  The difference is our clients know exactly how the plan works and their responsibilities at the end of the contract.

The difficulty today is that new car dealers and local banks are selling these balloon finance plans as “leases” and we English speakers from the west are expecting a very different reality when we hear the word lease.  Here is a simple rule of thumb to identify what your are being offered.  If any or all of these conditions are present

  • car is registered in your name
  • 0 money down
  • very low monthly payment
  • 36 month contract

it's more than likely not a real lease, and you will be surprised at your limited future options and the cost of completing your obligation.  

Why Are Israeli Dealers Promoting These Plans?

  1. It sells cars.  Payments using this plan are cheaper than conventional 60 month purchase contracts and real lease contracts.
  2. It’s also a cash flow issue.  The dealer receives all the money for the car, including the residual balance portion, at closing from the bank-because you are ultimately responsible for that money at the end of 36 months.

In a real American style closed end lease, which is what you are probably accustomed to and is what we suggest in most instances, the lease company is the bank.  They will agree to let you have use of the car in turn you will make the the scheduled payments while they hold the remaining 48-62% residual balance on their books.  At contracts end, if you do not exercise your option to buy it, then the leasing company will sell the car to recoup the rest of their investment.   This is a  very important feature for you.

Another Variation

There is another kind of lease being sold today by some lease companies.  This plan is more comparable to an American style Lease in that the car remains the property of the company, but there is a small catch.  Your option amount at the end of the contract floats until the day the contract ends. This plan makes it impossible for you to ever have money left over at the end of the lease to put towards the next car. They are pushing these plans not for your benefit but for theirs.  Be careful to ask a lot of questions.

The reasons you are taking or at least considering a lease beyond the affordability is:

  1. Protection from rapid and certain asset depreciation
  2. Avoiding the hassle of liquidation of the car when it has finished its service for you.
  3. Continual factory warranty protection against repairs

If you require an American style closed end lease, one which allows you to walk away at the end with no further obligations, should you desire to do so, please visit this link where you will find new and used cars for lease just like the ones you were accustomed to in the West.