Chapter 7: Leasing A Vehicle
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
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!
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
- 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
- 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.
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
- 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
- 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
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.
TIP: When dealers compete for your business -
Compare dealer prices from multiple discount dealers
in your area using Edmunds.
With multiple price quotes you'll be able to get
the best deal on the vehicle you want.
It's the fast, easy and headache free way