Better Leasing Deals
Written by Deborah Murphy - Wednesday, 20 August 2008
|
44
(0 votes, average: 0 out of 5)
You’ve noticed those incredibly low monthly prices offered by new car manufacturers’ TV ads? If you squint at your TV set, you’ll realize those are lease payments.
Auto leases have been common in the business world forever, but in an economy where we’re all nervous and counting our pennies, the idea of leasing your daily drive is more and more attractive.
Since leasing is a “business” financing mechanism, it’s more complex than a conventional car loan. It’s worth understanding the vocabulary and how a lease works; first, to determine if it’s something that will work for you and second so you can participate in the process instead of sitting in the dealer’s office, bug-eyed and confused. In the case of auto leasing, ignorance is neither bliss nor a good defense. The more you know, the better a deal you get. But, first a quick rundown on the pros and cons:
Pro
- A lower down payment, if any, is required.
- Payments are significantly lower than those on a car loan, roughly 40-percent lower.
- Cost for repairs are negligible, if any, since the car can be on warranty for the length of the lease.
- You’ll be driving a new car that would be financially beyond your reach had you opted to buy.
Cons
- You never own the car and as long as you lease, you’ll be making payments.
- If you end up beyond the mileage limitation or the car shows excessive wear and tear, you pay up at the end of the lease. Mileage restrictions range from 10,000 to 15,000 miles annually. Sounds like a lot, but a 10,000 mile limit is only 192 miles a week.
- If you have to get out of your lease before the term is up, you could face hefty fees and penalties.
- You can’t customize your car.
With a lease, you pay for the use of the car; with a purchase you pay for the car. That’s obviously an over simplification. The following outlines the major differences:
- When you finance a new car purchase, the loan covers the full purchase price of the auto often with the sales tax written in, minus your down payment. The interest rate is determined by the lending institution. At any time, you can sell the vehicle for its depreciated value.
- Your loan payments include a portion of the principle and a finance charge (interest). You can never recoup the amount you pay on the loan interest and the vehicle depreciates at the same rate, whether it’s a purchase or a lease.
- If you intend on driving the vehicle until it dies in your driveway, there will hopefully be a long period of time when you are making no car payments.
- When you lease, you only pay for the cost of the car estimated over the term of the lease. Example: Car price: $25,000; Lease term: 36 months; Residual, or depreciated, value of the vehicle at the end of the term: $12,000. Your payments are figured on $13,000 (cost minus residual value). Conclusion: look for a potential lease on a vehicle that holds its value well.
- The lease payment includes a depreciation charge and a finance charge. The finance charge is the interest on the money the lease company has tied up while you drive the vehicle. You pay sales tax (in most states) only on the monthly payment, not on the full price of the car.
- Leasing will cost you more than a purchase.
- Gap coverage, insurance to cover the difference between what you own on your lease and what the car is actually worth in the event it is totaled or stolen, is included in the lease to protect the lease company.
Now, down to the nitty gritty of getting the best possible lease.
- Make sure you have a closed-end lease where you literally walk away at the end of the term with only penalty payments for excessive mileage and wear and tear. With an open-end lease, more common in business, you are responsible for paying the difference between the estimated residual value and the actual value at the end of the lease.
- Rather than the manufacturer’s suggested retail price, you’re dealing with the capitalized cost—basically the same thing. Both are negotiable although the salesman will be startled that you realize that fact. The capitalized cost can be reduced by rebates, dealer incentives, trade-in credit and cash down payment. The lower the capitalized cost, the lower your monthly payments.
- Knowing the dealer’s cost on the vehicle will help with your negotiations. Unfortunately, you’d also have to know the dealer’s mark-up and any other incentive payments between factory and dealer to really have an edge. Try to approach a lease with as much information as if it were a purchase.
- Your lease rate, or money factor, is a small decimal number (i.e. .00321). Do not confuse that factor with a new car loan interest rate. To figure what actual interest rate the money factor represents, multiply the number by 2400. The actual interest rate on a .00321 money factor is 7.7-percent. With this knowledge, you can not only amaze people at cocktail parties, you can also understand what’s going on at the lease negotiation table.
- Set the lease term to run no longer than the factory warranty.
- Use websites similar to those available for new car purchases to scope out the best available lease deals. Check local dealership advertising. Manufacturers occasionally offer special subsidized deals, which are worth looking into.
With the savings you’ll realize on a lease vs. new car purchase, you can bank the difference with the intention of applying it to a down payment in a few years—with the hope the nightly economic news won’t be as dire as it has been for the last year.
|
More articles by Deborah Murphy
|
|
|
Subscribe to this comment's feed