Photo by Felix Carretto
Welcome to the wonderful world of care-free car non-ownership… or so they say. Leasing a car isn’t exactly the piece of cake all those ads would have you believe.
Lease agreements can vary greatly from company to company – so it is especially important to both understand the agreements and, of course, shop around for what you need. Also, as with any contract, you definitely need to read the small print.
There are tons of little details which can make leasing a car at best scary, and at worst, an ugly smear on your credit report and bank account. However, don’t let that deter you away because here is your simplified guide to leasing a car and coming out on top.
1. What does it mean to lease a car?
Basically, a lease is a long-term rental agreement.If you always like to drive a new car, or if you don’t want to pay for the depreciation of a new car, a lease may be a good idea.
However, if you drive your cars hard or keep them until they fall apart, think again: leasing is not as simple as a making some payments and giving the car back.
2. Is leasing a car cheaper or advantageous over buying?
Vehicle Leasing is better if you like to get a new car every 2 to 3 years, as it can lower your car payments or give you the opportunity to drive a more expensive car with a payment comparable to a less expensive car – i.e. a Lexus on a Toyota budget.
The chief disadvantage to leasing is that you must make a decision about buying a new car once the lease is up – you generally won’t be able to keep the car an extra month or two while you decide what to buy next.
Most leases have mileage caps; if you exceed the mileage allowed on your lease, you may be in for some hefty fees.Also keep in mind that leasing is typically reserved for folks with good to excellent credit. So if you have the credit and love all things new and shiny, then leasing a car is a great way to keep some of your budget for the next great thing that tickles your fancy.
3. What is some of the jargon I should know?
MSRP: The Manufacturer’s Suggested Retail Price (MSRP), set by the car company. This price must be posted in a new car’s window, but there can be additional charges that vary from dealer to dealer.
Capitalized cost: The vehicle price is called the capitalized cost. It is not so that as you a leasing a car you need not to bother about the capitalized cost. You need to negotiate on this as much as you do while buying a car because lower capitalized cost will ultimately result in lower monthly instalment.
Money factor (also called as lease factor): The lower this number, the better (multiply it by 2,400 to get an estimate of the interest rate). Dealers are sometimes reluctant to reveal the money factor, so be persistent.
Residual value: The residual value is the value of the car at the end of the lease. An inflated residual value lowers your monthly payments, but it can also hand-cuff you.
A more realistic residual value will make it easier to sell the lease, trade your vehicle mid lease or buy the vehicle at the end of the lease. Ask the dealer to show you deals from several banks, focusing on the money factor and the residual value. You can also visit sites like LeaseCompare.com or TheLeasingDirectory.com to compare lease options.
Lease rating / Depreciation rating: You should look up lease ratings to see which cars retain their value better and will therefore give you the best lease deal. Stay away from cars which depreciate quickly unless you’re willing to pay more and can afford to do so.
4. What payments are due at the beginning of a lease?
- Your first monthly payment
- A security deposit or your final monthly payment
- An additional down payment
- Fees to cover licensing and registration of the vehicle
- Freight and destination charges
- Processing fees
5. What type of lease is it?
Sign only closed-end leases. In a closed-end lease, if the car is worth less at the end of your lease than the leasing company estimated when you signed, they, not you, absorb this cost. Read the fine print and make sure you understand all the terms.
Photo by Florin CC
6. What are mileage caps and what should I know about them?
Since a car’s mileage affects its resale value, leases generally have an annual mileage limit, usually 10,000 to 15,000 miles per year. (The average American driver puts about 12,000 miles per year on his or her car.)
Be sure to ask about the mileage limit as well as the cost-per-mile penalty for exceeding the limit. If it’s too low, you can usually negotiate for a higher limit, but doing so will increase the cost of the lease. If you are a high-mileage driver – 18,000 miles per year or more – you may be better off buying the car instead of leasing.Be careful! One dealer trick is to offer a low-cost lease with an absurdly low mileage limit.
7. What is the duration of warranty and what does it cover?
If you lease for the length of the manufacturer’s warranty, you’ll never have to pay for major repairs. Make sure the manufacturer’s warranty covers the entire lease term and the number of miles you’re likely to drive.
8. What are the charges for wear and tear?
You may think the ding in the door or coffee stains on the upholstery are normal wear and tear; but to the dealer, it may be significant damage. Make sure you understand what is allowed as normal wear and tear in the lease agreement before you sign.
9. What maintenance expenses are your responsibility?
In general you are responsible for the costs of maintaining the vehicle during the contract period just as if you owned it. That includes paying for expenses such as insurance, oil changes, maintenance to brakes and tires, and other costs for regular upkeep. You are also responsible for all taxes that are assessed by your local government.
10. What are terms for premature termination?
Always expect the unexpected! Don’t let an unexpected problem become a lifelong credit regret. Make it a point to not only understand what happens if you have to get out of the lease early, but most importantly make sure you could reasonably afford it. Usually terminating a lease before it’s up can be extremely costly.
11. Should I get any special insurance?
The short answer is yes.
You will most likely need gap insurance to cover the difference – sometimes thousands of dollars – between what you owe on the lease and what the car is worth if it’s stolen or totaled in an accident. However, gap insurance only makes sense if you expect to be “upside down” on the car (you owe more than it is worth).
If you made a low down payment, if you bought a car that depreciates rapidly, if you have a high interest rate or if you rolled over other costs, such as money owed on a trade-in, into your new-car payments, gap insurance makes sense.
12. What payments might be due at the end of a lease?
This may typically include excess mileage fees, damage etc. Make sure you get all the details from the dealer of all fees they can tack on at the end of your auto lease.
13. How do I negotiate a car lease?
One strategy is to work out a reasonable purchase price before you let the dealer know you intend to lease. If a dealer knows from the beginning that you plan to lease the vehicle, they can waylay you by using leasing terms to conceal the real sale price on the car. But this method can thwart such a tactic.
The drawback to this method is it can be quite time consuming. However, you will be able to see if you can afford the lease payments and if the rates are reasonable. If you can invest the time, this is an effective approach.
For a slightly less risky approach, work with two dealers at once on the same model. Manufacturers usually offer the same car lease program for each model, so you will get pretty accurate numbers. Be sure to ask specifically for the money factor and the residual value. These numbers will vary depending on the length of the lease. Get these numbers in writing from the dealer, again to avoid any disagreements.
Your best negotiating ammunition is knowledge. The more you know about the process, the key terms, the calculations of the different figures, the more likely you are to get a good deal. Bring a calculator and a pad and pen. Go in confident, informed and educated.
Federal law requires dealers to provide lease cost information before you sign the lease. To make sure you get the right information, take a copy of this form for the dealer to fill out.
14. How can I buy leased car at the end of the lease?
Usually the end of lease purchase price, known as “Residual Value” is $3k -$4k more than the actual market value of a car. Smart shoppers know the buyout price is thousands over market value, and will turn in their leased cars to the leasing companies instead of buying.
Keep in mind there is also a $300-$400 non-negotiable “purchase option fee” buried in your lease contract waiting to bite you if you choose to buy the car at the end of the lease. Your strategy: Offer less than market value for the car.
Many leasing companies are arrogant and still play hardball. If you leased and basically got ripped off going into your lease, or if your gross cap cost was MSRP, don’t give them one cent more. If they don’t budge on the buyout price, exact your revenge on them by dumping another used car on them where they will lose $2000-$4000.
Don’t let them scare you with threats over mileage penalties, or non-matching tire fees, it still beats paying $4000 more for a car than the market value.
They’ll call you in advance to pressure you to buy the car. Research the value, dodge their calls, and show up at lease termination with a check in the amount you want to pay. Haggle smartly, telling them you know used cars are worth a lot less now. With no sale they will have to dump the car at auction.
Don’t pay them until they sign a buyer’s order first! If they reject your offer, walk away, game over. Now they have no time to strategize, the deal is over and you pinned them against the wall. Maybe they’ll chase after you before you drive out to give you the lower price, but if not, just keep on driving with a well-deserved grin on your face.
Section 179 Deductions
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