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Leasing a Car

Chapter 7: Leasing A Vehicle

Section Introduction:

Leasing has definite advantages for some people but the key to making it work is getting the right price and terms, while avoiding the pitfalls. This chapter discusses what a buyer should know to avoid those pitfalls. As with buying a vehicle, the consumer must do their homework but the information that must be acquired is the same; invoice price, depreciation and demand are still quite relevant to the lease deal. However, additional information is required for leasing including, capitalized cost, residual value and the money factor. Other factors must also be considered, such as mileage and warranty limitations.

If you are planning to lease a vehicle, read this chapter to become aware of all these considerations. At the end of this chapter, "Leasing your new vehicle", describes the process you should follow when you actually get down to business and talk to a dealership.

Good luck with your lease!

Avoid the pitfallsBe well informed about leasing to avoid the pitfalls

As is the message in the rest of this manual, knowledge gives you the power to get a deal that you are happy with and leasing is no exception to this rule. The first component of this leasing knowledge is to understand the how the lease deal works, both for you and for the dealership you lease from. This enables you to understand where the profits are and, from that, what is really negotiable when you haggle for a good deal.

  •  Your lease payment covers depreciation, interest, service fees and applicable taxes. The depreciation is calculated as the difference between the capitalized cost (The purchase price) and the residual value (the expected value of the vehicle at the end of the lease), while the interest is called the money factor, commonly expressed as a decimal fraction but easily converted to an annual rate by multiplying by 2400. For example, a money factor of .0045 multiplied by 2400 equals 10.8% annual interest.

  • Your monthly lease payments can be lowered by the following:

    • Lower capitalized cost-this can result from dealer discounts or one-on-one customer deal-making. If the quoted capitalized cost seems to be high or is based upon the full Manufacturers Suggested Retail Price (MRSP), you should try to negotiate this point with the lease provider.

    • Higher residual value-leasing a car that suffers less from depreciation should result in lower lease payments because less of the vehicle's value is lost in the lease period. In the course of your research into different car models you should be looking at depreciation already, whether purchasing or leasing, as this factor always affects the value you receive for your hard-earned money.

    • Changes in the money factor. Although this figure is supposed to be publicly available, it may be a struggle to get this from your salesperson or from the financial manager. It is possible however, to figure out the interest you are paying by doing the math with the numbers that are available. There is also good PC software applications designed to calculate lease deals for consumers.

The Automotive Lease Guide is an important reference for lease information in that it is an annually updated industry resource and it contains many useful lists of facts such as residual value percentages.

  • Look for overstated residual values. Occasionally, manufacturers want to subsidize lease payments on a particular vehicle model to move oversupplied stock or for other reasons. One way they do this is to inflate the residual value. A vehicle with an assigned residual value higher than that identified in the Lease Guide can indicate a good lease deal.

  • Watch out for low monthly payments and do the math to find out why they are so low. An attractive sounding lease deal may be less so when you add up the true costs of leasing service fees, wear and tear penalties, mileage and residual value for purchasing the vehicle at the end of the lease.

Protect yourself from additional costsProtect yourself from additional costs

The cost of going over your allowed mileage is relatively high and will quickly neutralize any good deal that you may have achieved through your careful deal hunting. Be careful in what you commit to and make sure that commitment is based on your own usage pattern plus a good cushion of at least 15%. Watch out for the following mileage pitfalls.

  •  Don't get a lease on a car with a certain mileage allotment based upon an intention to reduce your driving. Life is unpredictable but mileage patterns tend to be pretty consistent.

  •  If you are offered a lease deal with particularly low monthly payments, make sure that an inadequate mileage allotment is not the reason. Owing an enormous amount at the end of the lease will quickly make up for your monthly savings.

  •  Don't expect to be able to make up for more driving now with less driving later. It is not easy to leave a vehicle parked in your driveway for the last six months of your lease because you have used up your mileage. In fact, as vehicle use is so often a necessity, it is usually impossible to leave one sitting.

Don't take a lease that is not covered throughout by a good warranty. Any repairs you have to pay for in the lease period will come out of your pocket and go into the pocket of the vehicle's owner and this is not you! Unless you plan to buy the car at the end of the lease, you don't want to cover repairs.

Get gap insurance to cover you in case of loss from a serious accident, fire or theft. Most insurance policies cover only the depreciated market value and this can be considerably less than the balance owed on the lease.

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