Leasing - Quick Savings Tips

As you probably know, leasing is NOT for everyone. It works well for people who own their own business or those that file a Form 2106 (Employee Business Expense) with their tax return. For everyone else, leasing a car can be a rude awakening. If you're not careful, you’ll end up owing significant monies at the end of the lease for excess mileage charges, changes in the residual value, necessary repairs, fees, etc.

If you feel that a lease is right for you, then you need to know how to decipher a lease:

Know how residual value affects your payments
Understand that cap cost reduction is really a down payment
What a money factor is and how to translate it into an APR
Why exceeding your mileage number is so expensive
How to analyze the true financial cost of a lease

Action Item:
Click here to explore Lease Wizard

This software walks you through the entire leasing process, up to and including selecting the best leasing company.

Otherwise, you’ll be eaten alive by excessive fees, inflated residual value estimates, excess mileage charges, and huge early surrender charges.

Here’s what you need to watch out for when leasing:

Purchase price - The price you pay for the car is the largest component of your leasing payment. Do not make the mistake of failing to negotiate the lowest possible price on your car just because you are leasing it.

Acquisition cost - This is essentially a down payment. It’s often referred to as a capital cost reduction. Take this amount and divide it by the number of lease payments. Add that result back to your monthly lease payment to get a better idea of what you’re really paying each month.

For example, a $4,000 capitalization cost payment at the start of a 36-month lease really means that the monthly payments are $111 a month higher.

Remember, this “down payment” leaves you nothing at the end of the lease, so don’t allow it to be compared at all to the down payment when you purchase.

Residual value - This is what your car is supposed to be worth at the end of the lease. If it’s not worth that amount, then you’re on the hook for the shortfall. Dealers will always inflate the residual value to lower the payments. They don’t care what happens to you three years later.

Residual value can drop substantially due to the popularity or unpopularity of the used car, its mechanical condition, the miles its been driven, and the cars overall condition.

Mileage allowance - Leases are extremely skimpy on mileage amounts. That’s because higher-mileage cars are worth much less. Most leases give 12,000 miles a year or less. Any extra mileage is 20 cents a mile or more.

Look at your odometer and divide your mileage by the number of months you’ve owned it. Most people will be over 1,000 miles a month. This is a huge bill just waiting for when you surrender the car.

Fees and more fees - You’re guaranteed to get killed by fees on a lease. There’s a fee added to your down payment - it’s called a capitalized cost reduction fee; there’s a fee added for paperwork - it’s a $500 or more document fee; there’s a fee for surrendering the car - a disposition fee; there’s even a fee for having the right to buy the car at the end of the lease - it’s called a purchase option fee. So, watch out for fees!

Money Factor - Many people confuse the money factor in a lease with the APR or Annual Percentage Rate in a car loan. They are not even close to being the same thing, even though both represent the interest cost of financing a car.

In a lease situation, this interest is expressed as a “money factor” and is specified as a small decimal number such as .00297. That does not equal a 2.97% APR.

Money factors can be converted to annual interest rate (APR) by multiplying by 2400. It’s always 2400 and is not related to the length of the loan in months. For example, a money factor of .00297 multiplied by 2400 = 7.13% APR.

Comparing lease payment to loan payment - A lease is nothing more than a long-term rental agreement. Comparing those payments to a purchase is a big mistake.

You own the car when you’ve made all the loan payments. You own nothing when you’ve made all the lease payments. In fact, you probably still owe a bunch more money on the lease. You just haven’t been informed yet as to how much more you actually still owe.

Higher finance charges - A lease is not geared toward paying off the car, just renting it. When you lease, you end up paying much higher finance charges on the car than you do on a straightforward loan.

Why?

Because you are paying interest on a much higher balance for a much longer time with a lease than a purchase. The principal is getting reduced every month with a loan. With a lease, you’re barely covering the depreciation.

Remember, a car lease is just like making the minimum payment on a credit card. You’re paying interest on the interest!

Cost creep - The monthly leasing payment you were quoted didn’t include taxes and fees. When they’re added in to your actual payment, its $25 to $30 more than what you were quoted.

Or, you can pay the taxes and fees in the beginning, but remember that they’re really part of your monthly rental price. And it’s much higher than you think...

Cap cost fudging - Many people don’t understand leasing paperwork and simply accept the explanation they get from the dealer as the gospel truth. The cap cost figure on the lease paperwork is the actual price you are paying for the car.

Don’t believe the dealer when they say that finance charges are added to the purchase price to get that figure. That’s simply not true. And that’s where many people overpay for the car they leased. They didn’t know what they were talking about and believed what they were told.

Early termination cost - If you’re not careful, you’ll get killed financially when you terminate a car lease early. The two biggest risks are undoing a subsidized lease reduction and the hidden cost of accelerated depreciation.

A subsidized lease reduction involves a manufacturer making a payment to artificially prop up the residual value. When you terminate a lease early, you have to pay the difference between what the car’s supposed to be worth on that subsidized schedule vs. what it’s actually worth now.

Accelerated depreciation kicks in when your mileage and current condition are converted to current wholesale value. Depreciation is fastest in the first year, yet it’s straight-lined over the term of your lease. Early surrender kicks you in the rear big time!

Lease rate deception - In addition to all the potential risks mentioned above, there are often a lot of nonsense fees that get tacked onto the actual lease rate.

For years, Ford Motor Credit was actually tacking on 1.75% in additional administrative fees and charges each month. When the practice was discovered in the late 90’s, this ultimately led to a series of investigations and class-action lawsuits in 22 states. That finally ended this particular set of leasing financial shenanigans.

Like I said, leasing is not for the financially naive!

If you’re going to lease, use a powerful tool like Lease Wizard. Avoiding even a single leasing mistake will save you hundreds or even thousands of dollars. This package pays for itself many times over.

Always read and understand the paperwork on any contract BEFORE you sign your name. Afterward, it’s too late.