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Leasing Tips
Leasing Basics
Edmunds' Do-It-Yourself Guide to Leasing
You've seen the ads: VW Jetta for $189 a month. Jeep Grand Cherokee for $329 a
month. Lincoln Navigator for $499 a month. Wow! You can't believe your eyes. Actually,
you probably shouldn't believe your eyes when you read such ads —
at least not until you've read the fine print.
Like most shoppers, you want to lease the car of your choice for the lowest possible
price. Leasing is attractive because of low payments and the prospect of driving
a new car every two or three years. Many people figure that a car payment is an
unavoidable fact of life, and they might as well drive "new" rather than "old."
True, leasing is an attractive alternative, but there are some things you need
to understand about leasing before jumping in feet first.
What is Leasing?
Leasing is, well, renting. There are a few differences, however. When you rent
a car, you pay more for an expensive car than for a cheesy little compact. But
when you lease, you can sometimes get more car for less money.
Another advantage to leasing is that you only pay for the amount of the car's
value that you use. This is like going to the grocery store and getting a pound
of bananas, but not paying for the peels.
Here's how it works:
Say you want to lease a $20,000 car for three years. At the end of the lease,
the car will have depreciated (decreased in value) to $10,000. You've used up
$10,000 of its value. Divide this $10,000 by 36 to get your monthly payments.
Pretty simple, huh?
But wait a second. When you lease, you pay a significant amount of interest on
the transaction. And there are tax and license fees. And all cars don't depreciate
evenly. But still, the basic concept of leasing is that you pay for the depreciation
of the car.
Is leasing right for you? This question is hard to answer. It really depends on
your lifestyle and your preferences. We have summarized some of the key points
in the section that follows.
Pros & Cons
The lists below summarize the pros and cons of leasing versus buying:
Advantages of Leasing
- Lower monthly payments
- Lower down payment
- You can drive a better car for less money each month
- Lower repair costs (with a three-year lease, the factory warranty covers
most repairs)
- You can drive a new car every two or three years
- No trade-in hassles at the end of the lease
- You pay sales tax only on the portion of the car you finance
Disadvantages of Leasing
- You don't own the car at the end of the lease
- Your mileage is limited to a set amount, typically 10,000 to15,000 a year
- Lease contracts are confusing, so it makes it difficult to ensure you're
getting a fair deal
- Leasing is more expensive in the long run
- Wear-and-tear charges can add up
- It's hard to terminate a lease early if your driving needs change
Advantages of Buying
- Pride of ownership — you can do with your car as you please
- Car buying is more economical in the long run
- No mileage penalty
- Increased flexibility — you can sell the car whenever you want
Disadvantages of Buying:
- Higher down payment
- Higher monthly payments
- You're responsible for maintenance costs once the warranty expires (or have
to buy an extended warranty)
- Trade-in or selling hassles
- Your money is tied up in a car, which depreciates, rather than an investment
which appreciates
Certain lifestyles may work better with leasing. For instance, if you entertain
business clients, leasing allows you to drive a luxury vehicle for less money
(and there may be a tax write-off for certain professions). Other people just
like to drive a brand-new car every two or three years. So ultimately, leasing
isn't only a dollars and cents question — it's about personal tastes and
priorities.
Leasing's Hot Buttons
In every financial deal, there are the significant figures and there are the related
fees that don't have much effect on the bottom line. When you shop for a lease,
you need to understand the four important figures and watch them carefully (other
leasing terms are found in the Leasing
Glossary):
Capitalized Cost: Lease payments are based on the capitalized cost,
which is the selling price of the car. The price of the car is negotiable, so
you should negotiate this price first, then have the dealer write you a lease
based on this cost.
Residual Value: This is the predicted value of the vehicle at the end of
the lease term, and is expressed as a percentage of the MSRP (the sticker price).
Typically, a car is worth a little more than half its value after three years.
Sometimes, dealers raise the residual value to lower monthly payments. This is
OK, unless you plan to buy the car at the end of the lease.
Money Factor: This is lease-speak for "interest rate." It plays a big part
in the calculation of a lease payment. If the money factor is expressed as a percentage,
convert the percentage to the money factor by dividing the number by 24 (yes,
it's 24 regardless of the term of the lease). For example, a 7 percent (.07) interest
rate converts to a .0029 money factor.
Term of the Lease: This is the length, in months, you lease the car for.
Popular leases are 24, 36, 48 and 60 months. Some lease companies write leases
for 38 or 42 months. The 36-month lease makes the most sense because most cars
will be covered by the factory warranty for the entire time.
Later on, we'll show you how to calculate an estimated lease payment. You'll see
that these four figures will have the biggest effect on what you have to pay each
month.
How to Lease
Begin by finding a car that fits your needs and your budget. Then, calculate a
lease payment for this car using the information found in Calculate
Your Own Lease Payment. Plan to spend as little as possible on drive-off fees
— about $1,000 will start most leases. And we recommend you choose a three-year
lease term.
Now that you have a rough idea of the terms of the lease you want, it's time to
start shopping. You can do this over the phone. Or you can even create a blast
fax that will get you multiple bids from the dealers in your area.
To get a quote by phone, call a dealership and ask for the fleet or Internet manager.
Ask if they have the car in stock for which you are looking. If they have it,
tell them you have shopped around and you know what a good lease payment should
be. Tell them you only want to pay $1,000 in drive-off fees and lease for three
years. They will probably give you a quote that still has some wiggle room in
it (room to sweeten the deal). Make a note of the offer and call another dealership.
You can even make a second round of calls offering them the chance to improve
their earlier lease quote.
As you call, remember to always ask if tax is included in their quote. In some
cases, dealers quote a payment, without tax, to make it seem more appealing. If
tax isn't included, have them add it in and always work with the final figure.
Also ask if the contract includes gap insurance. If not, you'll need to budget
to cover this expense yourself.
Once you get a good offer for a lease, you can ask them to fax you a "lease worksheet"
that will show you all the numbers they have based your lease on. If they look
good, tell the salesperson you will accept the deal based on the numbers on the
worksheet. You now have a record of your agreement, not just a verbal promise.
Residual Values
You will hear a lot about residual values when you lease. Keep in mind that every
vehicle will have a unique residual value, based on its resale value, its reputation
for reliability and the term of the lease.
Since the residual value has such an effect on the monthly payment, it would be
nice to know which cars have high residual values. There are lease calculators
on the Internet that are extremely helpful. However, it would be worth your while
to visit LeaseWizard.com and consider its product. The LeaseWizard calculator not only comes with invoice
information, but it also has built-in residual information. Payment quotes are
easy to generate and the figures can be manipulated in a number of ways to provide
a complete picture of your leasing deal.
If you're upside down on your trade — your car is worth less than
you owe on the loan — you'll need to add the difference between the balance
due on the loan and the trade-in value to the capitalized cost.
In subsidized leases, the interest rates are very low and residual values
are very high. Subsidized leases allow dealers to lower payments by artificially
raising residual values or lowering the capitalized cost through dealer incentives.
You can easily recognize a subsidized lease. Any nationally or regionally advertised
lease is generally subsidized by the manufacturer to keep lease payments low.
The $189 per month VW Jetta is an example of a subsidized lease payment. It is
based on a 1.9 percent APR. If you read the fine print, you see that it is a 48-month
lease; tax and license fees have not been added; and it requires a $2,500 payment
at signing.
Your best bet when leasing is to choose a model with a subsidized lease. Payments
are low, terms are simple to understand, and they are the only true bargain in
the world of leasing.
Lower Payments
Low payments aren't a fallacy with leasing, when taken in proper context. Yes,
you can get into a car with less money down and pay less for that car for three
years. But if you buy the car (with a larger down payment and higher monthly payments),
you will eventually own it. Even though it might not be worth much on the market,
it could still be dependable transportation for you, or a nice pass-along vehicle
for a family member.
There are several other factors that should be kept in mind. When leasing, tax
is calculated only on the payment; when buying, tax is calculated on the entire
selling price. In other words, when you lease, you are only taxed for the portion
of the car's value that you use.
Other factors, like fluctuating interest rates, down payments and contractual
obligations can also affect the lease versus loan scenario. Additionally, vehicle
condition can have a tremendous effect on value. A few dents, dings or scratches
could easily make a lease the more expensive proposition, with charges for worn
tires, excessive mileage and cosmetic repair likely to top $1,000 at the end of
the contract. Of course, you can always keep your miles down and make any necessary
repairs before the end of the lease.
When trying to determine if leasing or buying is right for you, carefully weigh
all the factors that can affect payments over the term of the lease or loan, including
the way you drive and maintain a vehicle.
Restrictions
Leasing restricts your use of a vehicle. Mileage allowances are limited, modifications
to the vehicle can result in hefty fines at the end of the lease, and if the vehicle
is not in top condition when it is returned, wear-and-tear charges may be levied.
Many dealers and financing institutions will be more lenient if you buy or lease
another vehicle from them at the end of your term, but if you drop off the car
and walk, prepare yourself for the possibility of some lease-end hassles.
Be sure to define these limitations at the beginning of the lease so that you
know what you're getting yourself into. Find out what will be considered excessive
in the wear-and-tear department and try to negotiate a higher mileage limit.
One strategy to avoid additional charges is to pay for extra miles up front (usually
at about $0.10 a mile) rather than paying the over-mileage penalty on the back
end (often at $0.15 a mile).
Closing the Gap
If you decide to lease your next car, you may have to review your policy to make
sure it includes "gap insurance." This protects you in case you get in an accident,
or the vehicle is stolen, and the insurance company will not pay what you owe
the bank. This means you might have to come up with $3,000 or $4,000 out of your
own pocket.
In some cases involving an accident or a theft, the insurance company is only
willing to pay the current market value of the vehicle. Since new cars depreciate
steeply in the first year, there may be a gap between the current market value
of the car and the amount you owe on it. Gap insurance pays this additional amount.
Most leasing contracts include gap coverage. But if they don't, you can be in
for a nasty surprise if your car is wrecked or stolen. Make sure to ask if gap
insurance is included. If it isn't, call your insurance company to arrange for
the additional coverage. Or you can purchase gap insurance online through Carconsultants.net.
Conclusion
Closed-end leasing is a win-win situation for everybody except people who want
to keep their cars for a good long time. The manufacturer sells more cars, the
dealer sells more cars, and you get low payments and a new car every couple of
years. However, it is important to stress that you never own the car, and leasing
can be quite restrictive. If you're a low-mileage driver who maintains cars in
perfect condition, don't like tying up capital in down payments and don't mind
never-ending car payments, leasing is probably just right for you. If you're on
the road all day every day, beat the stuffing out of your wheels, enjoy a 'customized'
look or drive your cars until the wheels fall off, buy whatever it is you're considering,
because it will be less expensive in the long run.
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