Leasing a car, whether it’s a car, truck, van or SUV, has become very popular in recent years. The ads you see make leasing seem very attractive with their offers of low monthly payments and being able to drive the new car of our choice. We’re all accustomed to the fact that having car payments is almost a way of life, so we may as well be driving new cars in the process. Low monthly payments and having new cars every two years are the driving factors behind most people wanting to lease cars. It’s important, however, that you understand what you’re signing for when you sign your lease agreement. Reading all the fine print isn’t near as important as understanding what you read. There are pros and cons to leasing a car as opposed to buying and you need to fully understand them.
Advantages of Leasing:
- Lower down payment
- Lower monthly payments
- You’ll be driving a newer car for less money each month
- Less repair costs because the factory warranty covers most repairs
- You’ll be driving a new car every couple of years
- No need to hassle about trade-ins
- You only pay sales tax on the portion of the car that you’re financing
Disadvantages of Leasing:
- When the lease is up, you won’t own the car
- You’re limited to the mileage you can put on the car
- Lease contracts are often complicated so you may not always be getting a good deal
- Leasing is more costly when it’s all over
- Extra wear and tear on the car can be expensive
- Terminating the lease early is difficult
Once you decide that leasing is what you want to do, you’ll begin shopping for the car you want. You’ll see many leasing ads in newspapers, on television and at car dealerships offering special rates on some of the best-looking cars on the market. Most of these ads will advertise low monthly payment, low down payment or both. These deals “on paper” will almost seem too good to be true and, in some cases, they will be. Before you decide on one particular car to lease, it’ important you understand what the lease ads are telling you and what they’re not telling you.
Lease ads and contracts will have certain terms that you need to understand because they tell you a lot about what you’ll be paying and why. They may be on the ads, contracts or both. These terms include but are not limited to:
- Manufacturer’s Suggested Retail Price (MSRP)
- Capitalized Cost
- Capitalized Cost Reduction
- Residual Value
- Money Factor
- Lease Term
Manufacturer’s Suggested Retail Price
MSRP is the full price that you’ll find on the sticker on the window, stating what they will sell the car for including destination chargers and optional packages. Always research the MSRP of any car you’re interested in leasing before you go to the dealership. Seldom is the MSRP what the dealer will actually sell the car for. In fact, they’ll expect you to try to haggle the price down. A good deal is anywhere from $500 to $1,000 less than the MSRP. Although they’ll tell you they’re not making any money at that price, don’t believe them. It’s also a good idea to not tell the dealer you’re interested in leasing them. Let them believe you’re interested in buying the car until you have the lowest possible price, then ask what it would cost you to lease the car.
Capitalized Cost
Capitalized Cost is often referred to as “cap cost” or “lease price” and is the price that you and the dealer and agreed to as the final price for the leased car. It will be quite a bit lower than the MSRP. This is where the dealer makes their money so they’ll try to tell you that leases are different than buying and they can’t lower the price. This isn’t true so always try to negotiate the lowest possible capitalized cost because it will affect your monthly lease payment. Keep in mind that certain fees like loan origination fees will be included in this price.
Capitalized Cost Reduction
Cap cost reductions are things that will reduce your capitalized cost (lease price) such as trade-in credit, factory-to-dealer incentives, rebates or a cash down payment. Even the smallest cap cost reductions can make a difference in the amount of your monthly lease payment, particularly in shorter leases. Subtracting the cap cost reduction from the cap cost will give you the adjusted cap cost, which is the figure used to determine your lease payment.
Residual Value
Residual Value is the wholesale value of the car at the end of the lease term, minus the depreciation. The more it’s worth at the end of the lease, the lower your lease payments will be. Because no one can predict the future, car dealers use certain data from the car industry to determine the residual values. The residual value is based on a certain percentage of the MSRP. The older the car gets, the lower the residual value will be. For example, on a 36-month lease on a $20,000 new car, a 50% residual means that the value of the car at lease-end will be $10,000. The actual residual value may be more or less depending on the car. Car dealers have lease kits that determine residual values on different car makes and models.
Money Factor
When you lease a car, the car dealership is not just going to let you take the car without making a profit out of the deal. They make this money in the form of the interest they charge, which is what is referred to as the money factor, lease factor or lease rate. The money factor will be a small decimal number such as .00297, which is converted to an annual interest rate by multiplying it by 2400. The lease money factor should be similar, when it’s converted, to what the interest on a loan would be if you were purchasing a car. The better your credit rating, the lower your money factor will be.
Lease Term
The lease term in the number of months you’ll be leasing the car. Try not to go over 36 months because the residual value will be very low after that time.
Figuring Your Lease Payment
If you have certain information available to you about the car you want to lease you can figure out the lease payment, using the data below.
Lease payment = Depreciation Fee + Finance Fee + Taxes
Depreciation = (Net Cap Cost – Residual) divided by Term of lease
Finance Fee = (Net Cap Cost + Residual) X Money Factor
Taxes will vary according to state.
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