Car Leasing Tips
If it’s your first time leasing a car or you don’t have much experience with car leasing, it is important to do some research before getting started. Leasing a car is more complicated than one might imagine, but we are here to help you decide whether leasing a car is the right option for you. The following car leasing tips will help you make an informed decision while getting the best deal and avoiding getting ripped off.
Car Leasing Tip #1: Understanding Car Lease Basics
Leasing a car basically means renting a car for a set period of time. During the lease term or lease period, you are paying for the predetermined depreciation of the car. Add interest, taxes, and monthly fees, and you have your monthly lease payment. The value of new car, for example, depreciates between 50-60% during the first 3 years, which is also the length of most car leases (36 months) and most car warranties (3 years/36,000 miles).
Car Leasing Tip #2: Car Dealership Leasing
When you lease a car, you are actually leasing a car from a leasing company such as an independent car leasing company, the car manufacturer’s finance company, or a bank/credit union. It is very rare for a car dealership to finance their own car leases. The car dealership writes up the car lease agreement for their leasing company, then receives full payment in the amount of your negotiated price from the company.
For this reason, car dealerships may apply your up-front/down payment towards costs within the leasing contract instead of towards the negotiated price.
Car Leasing Tip #3: Independent Company/Bank/Credit Union Leasing
Other leasing options you can consider other than car dealerships are leasing cars through independent leasing companies, banks, or credit unions. The benefit of these options is that prices are set and there is no negotiating. These alternative car leasing sources usually have set contracts in place based on vehicle makes and models. If you are a member of a credit union, they offer some of the best rates and usually have more flexible mileage limitations, fees, and higher residual values.
Car Leasing Tip #4: Depreciation and Residual Value
Understanding the difference between depreciation value and residual value is important if you’re planning on leasing a car. Depreciation value refers to the decline in a vehicle’s value over time. Most new cars lose 50-60% of their value within the first three years. Residual value refers to the future value of the vehicle in terms of the percentage of depreciation of its initial value. A car’s residual value is basically an educated guess of what the car will be worth at a specific time in the future. To sum up, the depreciation value of a car refers to how much value is lost, while the residual value refers to how much value is left after a specific period of time.
Car dealerships use both of these terms often, sometimes with intentions meant to confuse unsuspecting customers. Dealers may tell customers that depreciation values and monthly payments are based on MSRP in order have them lease a car at MSRP. This is not the complete truth. Car leasing companies do base their depreciation value on MSRP, but also consider the residual value of the car. The tricky part is that the residual value of a car doesn’t change regardless of the agreed purchase price. Keep in mind that if you negotiate a purchase price less than MSRP, your monthly payments will be lower.
Car Leasing Tip #5: Monthly Payments
Monthly payments are mostly based on the depreciation and residual values of the vehicle. The formula for calculating your monthly car payment is the depreciation value (your capitalized cost minus the car’s residual value), plus interest/fees/taxes. Divide this amount by the number of months in your lease contract and you have your monthly car lease payment.
The length of the your lease contract is very important in this formula. Keep in mind that once you sign the car lease, you are obligated to make every single payment. The most desirable lease term is 36 months, because the car being leased will be covered by the manufacturer’s warranty for the full duration of the lease. Be careful of 39 month lease terms, because although you will have lower monthly payments, you are risking 3 months of driving a leased car without any warranty.
Car Leasing Tip #6: Interest Rates, Fees, and Taxes
Car dealerships and leasing companies are actually not legally obligated to disclose how monthly car lease payments are calculated. Normally, the only figure you will find on your leasing contract is the monthly payment. For this reason, car dealerships can easily hide costs, eliminated your negotiated cap cost, omit your trade-in value, or inflate the interest rate without you knowing.
Interest Rates
It is important to understand what your interest rate will be before agreeing to any monthly payments. If the dealer says that they’re not required to disclose that information, you have the right to simply walk away and save yourself the future headache. Car leases have what is called a money factor in place of interest rates. You can convert the money factor to an approximate interest rate by multiplying it with 2400. It is also important to know your credit score prior to shopping for a car lease, because that way you will understand whether the offered rate is fair. If you have very high credit and you are offered a high interest rate, you will know something is off.
Leasing Fees
Make sure you are aware of all the leasing fees involved in your transaction, and whether you are paying them upfront or month-to-month. Some examples of common car lease fees are:
-Acquisition fee: An administration fee charged by the leasing company that is not negotiable. The average range for this fee is $500-$1000 depending on the make and model of the vehicle, but some dealerships “pad” this fee so you can try to negotiate it down.
-Registration fee: This fee is due at signing and is required by your state and local governments.
-Documentation fee: Similar to the administration fee, the documentation fee is charged by the dealership and may be negotiable. It is common for this fee to be included in the monthly payment.
-Security deposit: This deposit is paid up-front and is usually the same amount as your monthly lease payments. If you are a returning customer or have excellent credit, this deposit is sometimes waived. At the end of the lease term, the security deposit can be applied as your last monthly payment or to cover damages not considered normal wear and tear.
-Disposition fee: At the termination of your lease, the dealership will charge you this fee as compensation for the expense of selling or disposing your car.
Sales Tax
In most states, you are only responsible for the sales tax on the depreciated value of the car during your lease period. In most cases, the sales tax is spread out among your monthly car lease payments. Check your state’s car lease tax laws before leasing a car, because it doesn’t make sense to pay all the sales tax on a vehicle you will be returning.
Car Insurance
Your leasing company will require you to purchase car insurance, just like a bank would if you were to finance a car.
Mileage Restriction Fees
Another fee you will be charged is calculated by the number of miles driven over your mileage limit. An average amount is 20 cents for every mile you drive over your mileage limit, which you will be responsible for paying when your lease period is over.
Car Leasing Tip #7: Up-Front/Down Payments
It can be easy to be misled by car leasing ads that promise low monthly payments and no down payments. Ads that promise 0 down and 0 due at signing are often misleading because there is usually a catch somewhere else in the contract.
It is important to understand the difference between a down payment and money due up-front. A down payment towards the lease of a car means that every penny is applied to reducing the capitalized cost of the car. Any money due up-front, however, is due when you sign the lease and is only applied towards lease fees and taxes. This means that the ads that promise low monthly payments with 0 down may still have tons of up-front fees and taxes that can cost thousands.
For these reasons, it is important to understand where all of your up-front cash is being applied. If you are making a down payment to reduce your cap cost, make sure none of the amount is applied to any up-front fees or taxes.
Car Leasing Tip #8: Study Your Contract
It may seem obvious, but you need to study your car lease contract before signing it. Do not feel pressured to sign on the spot if you are not sure about all of the terms of the contract agreement. Do everything possible to find the best deal. Take the contract home to study it and compare it with other car lease contracts. That way you will have a better understanding of the best deal for you. All of these tips will give you a head start and help you shop around for the best car lease deal possible!