| Understanding Leasing |
 Leasing is nothing more than a method of paying for the use of a car, truck, SUV, or van over a specified period of time. Even if it sounds like renting, it is not. While you can rent a car for as little as a day, or even a few hours, leasing typically starts at 24 months and doesn't provide for easy termination or vehicle swapping.Automobile leasing is based entirely on the concept that you pay for the amount by which a vehicle's value depreciates during the time you're driving it. Depreciation is the difference between a vehicle's original value (MSRP) and its value at lease-end (residual value), and is the primary factor that determines the cost of leasing. Residual value is determined by the leasing company and it is set for the term of the lease. Example: You are leasing Honda Accord EX with MSRP of $23,860 Residual value for 36 month is 52% Your vehicle's lease-end value would be $12,407.20 (52% of $23,860) When you lease, you negotiate a purchase price with the dealer just as you would if you were buying. This key point is not well known and dealers have even told customers that, because it's a lease, price is always MSRP price. This is simply not true. Generally, the only time you would not need to negotiate price is when the dealer is offering a special advertised deal in which the price and other factors of the lease are already set to attract your business. It is very important to understand that! Example: 1. If you lease your vehicle at MSRP of $23,860 you would actually pay for it $11,452.80 plus lessee costs, fees and taxes 2. Let’s say you negotiate the price till $21,860 so you would actually pay for it only $9,452.80 plus lessee costs, fees and taxes Once you and the dealer agree on a price, and you've signed the lease contract, the dealer actually sells the car to the leasing company at that price. The leasing company then leases the car to you, based on that price. For this reason, price becomes the most important factor in what you'll pay in monthly payments. Let's talk about lessee costs and fees you have to pay. *Documentation fee - document preparation fee, usually $45 to $55 *Monthly sales tax - instead of paying tax on the whole amount you pay it monthly *License fee - DMV registration fee, varies from state to state *Rent charge - now here you have to pay attention! Rent charge is the interest you will have to pay during the lease. It is pre-calculated at the beginning of the lease and included into your monthly payment. Except special leases, here dealers make most of their money. On your contract you will see total rent charge, but you will not see the actual interest you will be paying. This interest is called money factor. It is very important to know what money factor you are paying because dealers can trick you with it. Approximate interest rate you can get by multiplying money factor by 2400. Let's say dealer tells you that your money factor is 0.005 and it is very low. Don't believe him. Multiply 0.005 by 2400 and you will see that actually you would be paying 12% interest. That is not low at all. Dealers can make up to 2 points on the money factor. So if they giving you 0.005 they actually sell to leasing company for 0.003 and make those 0.002 points which based on our $21,860 price would be over $1000 in pure profit you would give to a dealer. Money factor is second most important factor in the lease after the price of the vehicle! If you decide to trade-in your car in the middle of the lease you have to keep in mind that you will have to pay all unpaid rent charge. Amount Due At Lease Signing. Dealer will charge you first monthly payment, license fee, documentation fee and tax at lease signing. You can negotiate that too. Actually the best is to negotiate with the dealer to put 0 out of your pocket at lease signing. That way dealer would pay all of those fees for you. He has to pay them. So even if you agreed on the price and the money factor, you can still get even better deal if you put 0 out of your pocket at lease signing. The dealer is not the leasing company The car dealer simply acts as an agent for the leasing company so that you don't deal directly with the leasing company until you start to make monthly payments. The dealer works out the terms of the leasing agreement with you on behalf of the leasing company. For this service, the leasing company usually pays him a commission, which adds to his profit on the deal. Once the contract is signed, your relationship is with the leasing company, not the dealer, unless it's an issue with the vehicle itself. Leasing companies used by dealers are usually subsidiaries of the car manufacturer (called “captive" leasing companies), such as Ford Motor Credit or Honda Lease Trust. However, dealers can also offer leases from banks and other lending institutions with whom they've worked out mutually beneficial business terms. So, automobile dealers are in the business of providing automobiles; leasing companies, banks, and credit unions provide leases. As a leasing consumer, you have the option to shop for your own leasing company, bank, or credit union to find better lease terms than the dealer's leasing companies can offer you. These independents can often arrange to get you an even better price due to fleet purchasing arrangements. The tradeoff is that dealers make it very convenient to arrange for both the vehicle and the lease all in a single meeting, and the dealer's captive leasing company can often offer special lease terms to help the dealer move vehicles. Signing a leasing contract means that you agree to make regular monthly payments, keep appropriate insurance, pay any vehicle taxes and licensing fees, and take good care of the vehicle. Further, you agree that you'll keep the car for a specified number of months — typically 36 or 48 months — and you're expected to stick it out to the end. At the end of the lease you're expected to return your vehicle to the leasing company with no more than normal wear and tear. You'll have to pay for any damage or extra mileage over and above your contract-specified limits. You may have an option to purchase your vehicle at lease-end for a specified price at the beginning of the lease, if you choose. Or you may be able to use the car as a trade-in on a new car. Otherwise, you can simply return the vehicle to the leasing company and walk away. Be careful, however, because you might just have equity value in your vehicle that you don't want to simply give back to the leasing company. Making the best decision about what you do with your vehicle at lease-end — returning it to the leasing company, buying it, trading it, or extending your lease — requires that you look at each option carefully and evaluate the tradeoffs. |
