Leasing a car can be a great option for those who are:
- Not looking for a long-term vehicle commitment and don’t want to deal with the responsibility of ownership
- Interested in fixed transportation costs, as leased cars are almost always under warranty, and many automakers now offer free maintenance programs…the result being one set fee for your car (no unexpected repairs)
- Looking for a way to drive a new car for a low monthly payment
Despite all the benefits to leasing, there are some problems that can leave you wholly dissatisfied (and which have given leasing a bad name in the past). Thus, it’s important to know how to spot a good deal. Here’s how you go about that.
Look for High Residual Value
One thing that many prospective lessees do not realize is that a car’s leasing cost is largely determined by what is known as its residual value. This is the estimated value of the car at the end of the lease; basically, the amount the dealership should be able to sell your leased car for when you bring it back.
The difference between a 40% residual and a 65% residual is incredible – your monthly lease payments can change hundreds of dollars a month based on this number, even when all the other costs are held constant. For this reason, it’s best to lease a vehicle that holds its value (a.k.a. has a high residual); this will result in lower monthly payments (and a higher quality vehicle too).
Lease Interest Rates, a.k.a Money Factors
These days, interest rates for car leases can vary greatly depending on the length of your lease and the other terms of your loan. Still, banks and other lenders know that they need to be competitive in this market to attract lessees, so be sure to shop around in order to find the best interest rates. Keep in mind that, in leasing parlance, an interest rate is known as a “money factor.”
To convert a money factor into an interest rate:
1. Take the number they give you and make sure it has five digits after the decimal point
2. Multiply this number by 24 to get the interest rate as a decimal, or multiply it by 2400 to see the rate as a percentage.
Sample money factors and equivalent interest rates:
|Money Factor||Interest Rate|
Also, if you’re looking at a new car with a special leasing program, it’s likely that the money factor on the lease is being discounted to reduce lease payments. Just like automakers offering 0% loans to help sell cars, they can also offer incredibly low money factors. In this situation it’s difficult (or impossible) to get a discount on the rate.
Watch out for Mileage Fees, Tricky Down Payments, Undisclosed Sales Tax, And Lease Return Fees
For a lot of consumers, leasing has a very bad reputation. Leases aren’t well understood, and when you combine that fact with numerous anecdotes about hidden fees and leasing company tricks, it’s easy to see why so many consumers are skeptical about leasing.
Still, if you know what to watch for, leasing is often very cost effective.
1. Don’t get burned on mileage
Too many leases specify that drivers must only travel 10k or 12k miles per year. This is a problem for most people, as even a 12k mile per year lease is only 1,000 miles a month. If you drive 15 miles to work everyday (and 15 miles back home), your regular commute is going to account for about 650 miles in an average month. Throw in weekend errands, trips to the store, etc. and you’re dangerously close to the monthly limit. If you take a driving vacation, you’re going over.
The problem with going over is that it’s incredibly expensive – the leasing company may charge as much as $0.50 per mile for overage. That’s $500 if you go 1,000 miles over, $5,000 if you go 10,000 miles over. Therefore, make sure your lease matches your average mileage use.
2. Beware Down Payment Tricks
When you lease a new vehicle, there are a few fees due up-front:
- A security deposit, which is typically based on your monthly payment and sometimes waived
- Sales tax on any “cap cost reductions,” like rebates or money down
- An actual cash-out-of-pocket down payment
The “trick” you need to be aware of is simple: some dealers will tell you that your down payment is $2,000. You take that to mean that you’re writing a check for $2k, but in reality you’re writing a check for quite a bit more by the time you pay your taxes and security deposit. Therefore, don’t negotiate your “down payment” – negotiate your “cash out of pocket.” There’s a difference.
3. Is sales taxes in your quoted payment?
Sales tax is due on your lease payments, but only at the time they’re collected. Thus, you could be told that your lease payment is $500 a month when you leave the dealer, but end up getting a bill for $550 a month (assuming your sales tax is 10%) in the mail, as the payment the dealer told you didn’t include sales tax.
Therefore, when you get a lease payment quote from a dealer, make sure it includes sales tax. If you’re not sure about your sales tax rate, it’s a good idea to verify the rate for yourself so you can double-check the dealership’s estimate.
4. Know about lease return fees.
While lease return fees aren’t as common as they once were, some leasing companies will charge you a fee to return their vehicle to them at the end of the lease. This may or may not be negotiable, so you need to know what they are.
It’s also a good idea to make sure you know what a typical damage inspection looks like. When you return your vehicle, the leasing company is going to go over it with a fine-toothed comb to see if they can find damage that they can bill you for. Therefore, it’s a very good idea to a) understand what qualifies as “normal wear and tear” and what doesn’t and b) ask for a sample damage inspection report.