For many people, leasing is a great option. You can drive a more expensive car for less
money and get a new car every few years.
But before you jump in, there are several things you need to know.
1)
Leases are negotiable! – Believe it or
not, some people think you can’t negotiate the payment. I’ll explain how as we go along.
2)
Cap cost – this is the negotiated price
of the vehicle. You can talk this down
in the same manner as if you were buying.
Some dealers might lead you to believe that the cap cost is set in
stone. Don’t believe them. Have them negotiate or leave!
3)
Cap cost reduction – this is where
rebates, incentives, trade-in or cash down are applied. When you see a manufacturer offering low lease
rates, they will often include an incentive here to drive down the monthly
payment. They might also be quoting a
low mileage lease (10,000 miles) to lower the amount. Remember that on average, people drive close
to 15,000 miles per year!
4)
Money factor – this is the interest rate
of the loan, but it’s not given as a percentage. You’ll typically see it given as a 4 or 5
decimal number (.0012). The way to
convert this number to APR is to multiply it by 2400 no matter the length of
the loan. For example, a money factor of
.00297 would actually be an APR of 7.13%.
Be sure to do the math!
5)
Residual value – this is the best guess
of how much your car will be worth at the end of the lease. It can be given as a percentage or actual
dollar value. Low mileage leases
typically have the lowest monthly payment because the residual values are
higher. It works the other way if you
choose a lease with 15,000 miles per year.
This is non-negotiable and is based upon data compiled by the
manufacturer and dealer. A good rule of
thumb is to go with cars that have a residual value greater than 50% after 3
years. Anything less than that gets more
expensive.
6)
Lease term – this is the length of time that
you will be paying for the car. Typical
terms are 24, 36 or 48 months. There can
be some different ones such as 30 or 39 month leases. I would not take a lease for longer than the
general bumper to bumper warranty, with the average being 36 month, 36,000
miles. That way you’re not stuck with
repairs after the warranty expires. Also
be sure to check the over mileage penalty.
If you go over the limit, this could add quite a bit to your overall
cost.
7)
Know what you’re paying – over the term
of the lease, you’ll be paying for the difference between the Cap Cost (minus
reductions) and the Residual Value. This
amount will be charged an interest rate and then your monthly payment is
calculated.
8)
Sales tax – your sales tax is calculated
off of your monthly payment. So if your
monthly payment is $320 and your sales tax is 7%, then your payment will be
$342.40. No way around this!
9)
Gap insurance – you need it! This insurance will cover the difference
between what you owe (your lease contract) and what your insurance company says
the car is worth. This is most important
at the beginning of your lease. Here’s
an example. You lease a new car valued
at $30,000. After 1 month it’s totaled
in an accident. You still owe the
equivalent of $28,000 ($11,500 + $16,500 residual), but the insurance company
says it will pay $24,000 (value after depreciation). You are on the hook for the $4,000 unless you
have gap insurance.
10)
Shop around – You can shop lease deals
around the same way you can if you were buying.
See who has the best offer and service.
Ask for the quote in writing and have them include all of the numbers I
listed above. That way you can compare
apples to apples. Ask what money is due
at signing and if that includes the first month’s payment.
Now you’re equipped with all the information you need to
make an educated decision. Take your
time and crunch all the numbers. A
change in any one of those numbers can significantly affect your monthly
payment. As always, feel free to ask me
if you have any questions.
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