Leasing Explained Finally...
Mar 16 '00
Auto leasing results in some car buyers getting a better deal overall, most car buyers getting a far worse deal overall but paying less per month, and car dealerships selling more cars and making more money per leased car. Leasing adds a new level of complication and difficulty to car buying that most people would do best to avoid. Leasing regulations and laws vary from state to state. My experience is in California with a closed-end-lease. I was able to have a positive leasing experience because I thoroughly read and completely understood the lease contract, and negotiated well. I leased a 1994 new car for 36 months and sold it in 1997.
Leasing Terms~~~Example~~~Definition or how it is calculated.
Capital Cost~$26,500~Purchase price of car, MSRP was $28,900.
Lease Term~36 months~Number of months you will lease the car.
Residual Value~$15,414~Value at lease end set by Lease Co.
Bank Fees~~~$525~~~Fees charged by Lease Company.
Money Factor~0.00385~A factor similar to an interest rate.
Use Tax Rate~7.25%~Use tax rate is equivalent to sales tax.
Capital Reduction~$4,308~Part of down payment that reduces the capital cost.
Total Capital Cost~$27,025~Capital Cost + Bank Fees
Net Capital Cost~$22,717~Total Capital Cost – Capital Reduction
Total Depreciation~$7,303~Net Capital Cost – Residual Value
Dep Payment~~~$203~~~Total Depreciation / Lease Term
Net Cap + Residual~$38,131~Net Capital Cost + Residual Value
Rent Payment~$147~(Net Capital + Residual) x Money Factor
Use Tax~$25~(Dep Payment + Rent Payment) x Use Tax Rate
Dep + Rent Payment~$350~Dep Payment + Rent Payment
Monthly Payment~$375~Dep Payment + Rent Payment + Use Tax
Cap Reduction Tax~~$312~~Capital Reduction x Use Tax Rate
License Fees~$530~California state Vehicle License Plate fee.
Advance Payment~$375~1st Monthly Payment paid in advance.
Capital Reduction~$4,308~Part of down payment that reduces the capital cost.
Total Down Payment~$5,525~Total $312 + $530 + $375 + $4,308 to drive off.
Equivalent Interest~9.24%~Money Factor x 2,400 approximately.
If you take a calculator and start at the top, you can see how all of the various factors used in calculating a closed-end-lease are determined. You may want to work through this a few times to get a feel for what the hell is going on. This example is directly from my lease contract of a 1994 Dodge truck leased for 36 months.
So, does this mean that leasing is a good deal? Not always, and probably not even usually. This deal was good for me because of the following very important reasons!
I negotiated the purchase price of the car before ever discussing leasing. I negotiated a purchase price of $26,500. The Manufacturers Suggested Retail Price (MSRP) was $28,900. I made sure the negotiated purchase price was put on the lease contract as the Capital Cost.
I made sure the Residual Value was reasonable. In my case the Residual Value of $15,414 is 58.2% of the Capital Cost (negotiated purchase price) and 53.3% of the MSRP. Some leasing companies set this value higher and some set it lower. If a higher Residual Value is set and you turn in the car at lease end, the company may try to find a way to charge you more for “wear and tear” in order to get back money they gave up by setting it too high. If a lower Residual Value is set and you turn in the car at lease end, the company will auction it off for more than the Residual Value and pocket money that you gave up by paying too much to lease it. If you buy the car at lease end and the Residual Value was set too high, you will have to pay more than the car is worth. If you buy the car at lease end and the Residual was set too low, you will have paid too much during the lease, but will recover some of that by buying the car for less than it is worth.
In my case, I sold the car to another private buyer myself and pocketed the difference between the Residual Value of $15,414 and the price I sold it for of $22,000! I am not kidding! I got a check from the private buyer’s credit union for $6,586. However, this is not typical… The particular car I sold had a high resale value because it was a turbo-diesel 4x4 Dodge Ram truck and they were in high demand at the time. I also maintained it very well, so it looked new. More typically a car will be worth close to its Residual Value.
Most importantly, I spent time thoroughly reading and understanding the lease contract and what my responsibilities and options were under the contract. I made sure the Bank Fees were not too high and the Money Factor was equivalent to a reasonable interest rate. The worst thing I could have done at lease end would be to turn in the car because the lease company would have charged me $.15 per mile for the 5,000 miles that I was over the agreed 45,000 miles. Also, if I turned in the car I could not have sold it and recovered $6,586 from its high resale value.
Leasing also has the advantage of only paying Use Tax (sales tax) on part of the value of the car. When you buy, you pay sales tax on the entire value of the car.
Now, here are some very important reasons not to lease.
If you do not completely understand the lease contract, dealers will find a way to make more money on the deal by either inflating the Capital Cost to MSRP or even higher, setting the Residual Value too low, charging very high Bank Fees, charging you a very high Money Factor, or extending the Lease Term. In short, if you do not know exactly what you are doing, dealers will find all kinds of “smoke and mirrors” ways of making you think you are getting a good deal when in reality you are paying way much too much for the car.
A dealer will show you numbers and payments and wear you down until you finally give in. They may gradually lower the monthly payment to entice you to sign the contract, while changing the Lease Term from 36 months to 48 months to 60 months and so on. You may think that you are getting a better deal, but they will actually make more money from you by giving you a slightly lower monthly payment on a longer Lease Term.
Leasing restricts what you can do with your car. Usually you cannot get out of the lease in the first year without paying a large penalty. You may not be able to modify the car. You will have to carry insurance to pay for any lost value if the car is in an accident and is a total loss during the lease. This is called gap insurance.
As you read other opinions you will come across horror stories of being ripped off badly. Information and understanding is your only weapon against having your wallet systematically thinned for you courtesy of your hometown new car dealer…
Happy motoring! ;-)
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Member: Leon
Location: Central California Sun Shine and Great Blue Skies
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