Deciding whether or not leasing is an option for you is not a simple
process. There are advantages to leasing, and there are people for
whom leasing is the right choice. Are you one of those people? Not
sure? Well, here you will get the gist of leasing and hopefully be
able to choose if it's for you. We'll answer the following questions
to help you sort it all out.
Webster's Dictionary defines a lease as "a contract by which one conveys
real estate, equipment, or facilities for a specified term and for
a specified rent." In other words, a lease is a fancy way of saying
you will be renting a car. But not like the typical car rental. With
a lease you are paying monthly installments, which will reflect an
interest rate as well as the depreciation of the value of the car
you are leasing.
While most people think they are leasing from a dealership, in reality
you are leasing it from a leasing company. The dealership sells the
car to the leasing company, who then lease it to the consumer under
the terms agreed upon between the consumer and the dealer. These terms
include the capitalized cost, the monthly payments, the length of
the lease and the interest rate.
No, there are two kinds. They are referred to as closed-end and open-end
leases.
- Closed-end leases
- In a closed-end lease, you may return the car at the end of
the lease and "walk away." However, you're still going to be responsible
for certain end-of-lease charges, such as excess mileage, wear
and tear, and disposition. You also have an option to purchase
the car at the end of the lease. The residual value of the car
at the end of the lease had already been determined when you initially
signed the lease. If you choose, you may pay the residual value
of the car plus a processing fee, and the car is yours. This is
the most popular type of lease.
- Open-end lease
- An open-end lease should only be considered for commercial business
leases. In an open-end lease, the market value of the car is determined
at the end of the lease contract. This is then compared to the
pre-determined residual value of the car, and cha-ching! You pay
the difference, which can be quite hefty.
There are other options available in a lease. You can get a single-payment
lease, where you make a lump sum payment rather than monthly payments.
This can result in you paying less on the lump sum, as compared to
the total of the monthly payments. A maintenance lease requires that
all maintenance and service responsibilities are the paid by the lessor.
This can be a partial or full maintenance lease, which may also include
mechanical repairs.
Depending on your needs, there are specific advantages to a lease
program. Here you will hopefully learn some of them, which should
help you determine if the lease is the way to go.
Here are some advantages to consider:
- Lower Monthly Car Payments
- The monthly payment from a lease will be lower than the monthly
on a purchase. The reason behind this is that on a lease, you
are not paying for the whole car, just the portion of the car's
value over the lease period. Monthly payments on a lease can be
up to 60% less. Therefore, for the same price, you can drive a
nicer car under a lease than under a conventional loan.
- Lower Upfront Costs
- Down payments on a lease are usually much smaller as well. Generally
you will pay a deposit of your first monthly payment, as well
as tax, title and registration fees where applicable. You may
elect to pay a larger down payment to reduce your monthly payments.
- The Tax Factor
- There are tax benefits to leasing a car, both state and federal.
Again, since you are not paying for the whole car, you are also
not taxed on the whole car. The sales tax, which will be considerably
less, can be stretched out across the lease period, incorporating
it into your monthly payment. A federal tax reform initiative
instituted in 1989 has been gradually discontinuing the option
to deduct car loans on federal tax forms. This can make a lease
more attractive, especially for business leases.
- Low Maintenance
- Part of the attraction of a lease is that you can sign in relationship
to the length of the manufacturer's vehicle warranty. By doing
so, you will always be covered should anything go wrong.
- Easy Come, Easy Go
- The cool thing about a lease is that when it's up, you turn
in the car and walk away. Then you can start fresh with another
lease. An added bonus to this is you rid yourself of the nightmare
that is selling a used car, or haggling over the value of a trade-in.
Just like the advantages, there are disadvantages to a lease depending
on your needs. Some things to consider:
- Early Termination of
the Car Lease - There are most likely fees involved in the
early termination of a lease, fees for which you will be responsible
to pay. Early termination can be involuntary as well. If the vehicle
is stolen and not recovered, or totaled in an accident, the lease
is forced to end. Very often your insurance reimbursement will
not cover the entire balance due on the lease. Therefore you pay
the rest. However, many leasing companies offer gap insurance,
which provides you financial protection in such an event.
Also, when paying a lease, you are paying for the depreciation
plus interest. The depreciation is calculated as the difference
between the cap cost and the residual value. While the depreciation
is paid off evenly over the lease term, the depreciation of a
car is not linear. The difference in the actual depreciation and
the paid depreciation is known as the gap amount, and will also
be paid in a prematurely terminated lease.
Additionally, some leasing companies will require you to pay off
the remainder of the lease contract before releasing you from
the lease. Others will require a flat rate termination fee. Make
sure you read all the fine print before signing your lease contract.
- Insurance Costs
- Leasing a car can bring on higher insurance rates since you
may require more coverage than you're used to paying. Contact
your insurance agent to get an idea of what you insurance costs
will be before signing a lease.
- Car Mileage - Most
leases have a limit on the number of miles you may drive, usually
anywhere between 12,000 and 15,000 allowable miles per year. Excessive
mileage equals more money, usually about 10 to 15 cents per mile
over the agreed upon yearly figure. This can add up fast, especially
if you drive a lot.
- Wear and Tear -
Like mileage, there are limitations on the wear of a vehicle under
a lease. Exceeding these wear limitations may result in more fees.
- Creditworthiness
- Since the car you will be driving belongs to someone else, that
someone else needs to be confident that you will keep the car
in good condition and make your payments on time. This means that
credit requirements are more stringent on potentially leasing
a car. Therefore, if your credit history is spotty, your chances
of getting approved for a lease will be spotty as well.
Don't worry. You don't need to be Archimedes to figure out a lease
payment. There a few numbers you will need to find out in order to
plug them into a simple equation. Once this is done, the result will
tell you what your monthly payment will be. These are numbers that
can be made available by a dealer, in accordance with the Federal
Consumer Leasing Act. (The dealer is not required to give you the
money factor, however, you can get it if you are persistent. The money
factor is roughly equivalent to an APR divided by 2,400.)
First, we need to figure out the monthly depreciation of the vehicle.
To find this, subtract the residual value of the vehicle from the
cap cost. Take the difference and divide it by the number of months
you plan to lease the car. This calculates the monthly depreciation.
Next we will tackle the monthly finance charge. This time add the
residual value and the cap cost, then multiply that by the money factor.
This results in the monthly finance charge.
Now, simply add the monthly depreciation and the monthly finance charge,
and you have calculated your monthly payment.
Other than actually paying money, this is my least favorite part of
leasing a car.
Generally, the negotiating process is clear and straightforward, without
headaches. But you need to be on your toes at all times in order to
not get taken for a ride. Negotiating can be tricky, especially since
we are conditioned to think that the dealer is trying to pull a fast
one. Yes, a dealer's goal is to make money. But that doesn't mean
they are going to jeopardize their job to do so. Sure, there are exceptions
to the rule, but most dealers are going to give you a square deal.
But during negotiations, be sure to get everything in writing, even
when the dealer simply states a number. Once it's written down, the
dealer can't go back on his or her word.
And always remember: You are in control. You are the one who decides
whether or not the terms of the deal are fair. After all, if you don't
like them, you can walk away. The dealer is dependent upon you for
a deal. If a deal is not made, the dealer loses the sale and earns
no money.
One strategy to take in the negotiations is to work out a reasonable
purchase price before you let the dealer know you intend to lease.
By not tipping your hand, the dealer may be under the impression you
plan on buying the car. If a dealer knows from the beginning that
you plan to lease the vehicle, he or she 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 that it is quite
time consuming because you will not reveal your intention to lease
until the very end of the negotiating process. It is only after that
you will receive the money factor and the residual value. Then you
will be able to see if you can afford the lease payments, or if the
rates are reasonable. If you can invest the time, this is an effective
approach.
Another strategy will help you avoid the uncertainty of previous method.
Work with two dealers at once on the same model. Manufacturers usually
offer the same lease program throughout 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 information above, about the key terms, the calculations of the
different figures, the better off you'll be. Bring a calculator and
a pad and pen. Go in confidant, informed and educated.
All of them, really. Unfortunately there are a number of scams some
of the more unscrupulous dealers will try to pull. But after reading
below, you will be aware of these shams and ruin a shady dealer's
attempt to rip you off.
- The Secret Price Hike
- This one is said to be the most common scam out there, most
likely because it is easy to pull off. Here's how it works: You
negotiate with the dealer over the price of the vehicle. After
a while, he or she gives in, and gives you a good price. The dealer
may even remark on you negotiating, pointing out how you have
skills. Then when the dealer leaves to write up the paperwork
and returns for you to sign. You do so, not noticing the dealer
added more to the monthly payment. And since you've already signed,
you're locked in. And you can rarely get out. The lesson? Always
do the calculations yourself. Make sure you get all of the pertinent
numbers from the dealer; the residual value, the money factor,
taxes, down payment, rebates, etc. Check the dealer's math. If
the figures come up wrong, don't sign the contract.
- The Disappearing Trade-In
- This is a simple yet profitable scam. The dealer simply leaves
your trade-in off the contract. They will also do this with the
rebate. Or, the more creative shysters will create some random
fee that is about the same price as your trade-in value or your
rebate. Once again, always do your own calculations and double-check
the dealer.
- The Money Factor/APR
Switcheroo - This scam may seem like an obvious one to see
coming, but it can easily fly under your scam-detection radar
if you're not careful. As we learned earlier, the money factor
and the APR can both be expressed as decimals. However they are
not interchangeable, though they can appear similar. But if you're
not careful to see this trick, the difference in the decimals
can cost you around $2000.
- The Early Termination
Scam - This is a scam to watch out for even if you plan to
keep the car for the entire lease, because an early termination
can come without warning. The idea behind this scam is that, in
the event of an early termination, a dealer will jack up the early
termination fee and pocket the difference. To do this, the dealer
will often need to work in tandem with the leasing company. However
it can easily be pulled off. The details of leasing contracts
can be quite confusing, and since it isn't as much of a concern
to the lessee as monthly payments or interest rates, the early
termination fee can be overlooked. When negotiating your lease,
make sure you iron out this detail in case you need to exercise
the early termination. And be sure to read the details before
beginning early termination process.
- The Phony Lease vs.
Loan Comparison - A dealer may present you with a lease vs.
loan comparison in which he or she will claim that it illustrates
that one is better than the other. This is bunk. Never trust a
lease vs. loan comparison. They are almost always rigged, and
are potential set-ups for the Secret Price Hike or the Disappearing
Trade-In.
- The Single-Payment
Lease Scam - Some people opt for a single-payment lease, which
allows you to pay for the lease up front rather than making monthly
payments. By paying the lump sum, you can lower the lease rate
and save money over the long haul. But the crafty dealer will
charge you the normal lease rate, cheating you out of your savings.
Once again, do your own calculations and you won't get shafted
by the dealer.
- The "Options" Lease
- The "Options" Lease can be a tricky one to catch, but equally
tricky to pull off, considering the dealer who practices this
sham is ripping off the leasing company as well. This makes it
dicey for the dealer, because if they catch a dealer ripping them
off, the dealer is through. For this reason, the "Options Lease
is rarely practiced. The idea of the scam is simple: Mark up the
gap cost and the residual value by "adding" options that can go
undetected. For example, they can tell you that you have a sport
suspension or a higher end stereo system, but without really inspecting
you have to take their word for it. As you've probably guessed,
you won't get the sport suspension or the higher end stereo system,
but you'll pay for it, and the dealer will pocket your cash. This
scam could also work on the back end. When you turn the car in
at the end of the lease, the dealer could charge you for the missing
components, like super-hydraulic struts or a surround sound stereo.
How do you avoid this one? First obtain the MSRP from two places
other than the dealer and use them to compare the sticker price
at the dealership. With these you can find out the gap cost and
the residual to make sure all of it adds up correctly.
- The Undisclosed Acquisition
Fee - An acquisition fee is required by most leasing companies
in order to open a lease. This fee, also known as a lease origination
fee, is usually around $450, but can be as high as $700. Originally
this fee was invented by the dealers, who would claim the leasing
company charged the fee. The dealer would then pocket the fee.
But the leasing companies caught on, and began charging the acquisition
fee on their own. The dealers are trained to integrate the acquisition
fee into the lease in order to let it go unnoticed. To avoid this,
always ask for everything, every single dollar on your lease agreement,
to be itemized and explained clearly. This way you can save yourself
from paying these or other hidden costs.
- The Extended Warranty
- An extended warranty can be a great thing for a car owner. However,
when you're leasing a car, you don't own the car. Also, since
your lease term will most likely last five years or less, the
leased car will be under warranty for the entire duration. Therefore,
the warranty is a waste of money and a way for the dealer to make
money. They'll tell you things in an attempt to sway you. They'll
tell you it'll increase the value of the car at the end of the
lease, but you won't own the car at the end of the lease. They'll
say that the warranty is refundable, but forget to tell you that
it'll be prorated and pretty much worthless by the end of the
lease. A good rule of thumb: Never sign a lease for longer than
the manufacturer's normal warranty. That way, you'll always be
covered and you'll avoid the need to extend a warranty.
- The Bogus Trade-In
- This scam is actually initiated by the lessee. Sometimes when
a lease is running, you can get the urge to end it early and get
yourself a newer ride. But don't make this mistake. There is no
such thing as trading in your lease. When you are doing this you
are terminating the lease early, which comes with fines. However
the dealer will be more than happy to "trade-in" your lease. What
the dealer will do is carry over all the penalties and fees from
the early termination onto the new lease. You will then pay them,
but with interest. To avoid this scam, don't "trade in" your leased
car.
There are other ways for the dealer to rip you off after you sign
a lease. Known as "Call-Back Scams," a dealer will phone you about
a month after you've signed the lease and inform you of an error in
your contract. They will attempt to minimize the overall effect it
will have, saying it'll only cost you $5 or $6 more a month. Then
when you get to the dealership to sign your "corrected" contract,
it'll be closer to $13 or $14 more a month. Or, they will try to get
you to renegotiate your existing contract to a longer lease, but at
a higher percentage. Don't be fooled into thinking you have to pay
more or you have to renegotiate. It's just a way to get more money
from you. And they have no right to rescind on an existing lease contract,
unless you are delinquent on payments. But think about it. Do you
believe that if you called the dealer and said you wanted to renegotiate
your contract for a lower percentage, they would do so? No way. So
why should you? If your dealer calls you with any demand for more
money or for a renegotiation of your lease contract, ask them to put
it in writing so you can show it to an attorney. See if they still
make their demands after that. However if they do so, follow through
and consult an attorney. Chances are the dealer is making a bogus
claim and the attorney will catch it. But by all means, if this happens,
do not sign anything without consulting an attorney. |
