Before I started selling cars I had heard the word leasing for many years. I really never knew how it worked nor did I care because all I knew was ,you didn't "own" the car. That alone was enough reason for me not to care. I mean who wants to make monthly payments on something they will never even own? The driver that leasing applies to. That is who should. After working in the business for some years I got a much better understanding toward it and learned in some cases, when the customer fits a certain demographic. It makes perfect sense.
I am going to tell you why certain buyers will always come out a winner on leasing. I also want to point out how many people actually never receive a title for the car they make payments on and never own it themselves. Until you pay your car off your bank is essentially the owner. After all, if you have a loan right now. Your financial institution has the title to your vehicle locked up in a vault. When I brought up leasing to customers the typical response was a quick no. If you have a car payment you do not fully own your car yet and if you trade it in before you pay your loan off you never owned it. Think of leasing as paying for the part of the car you are going to use, because that is exactly what you are doing.
Examples of when leases work in your favor is when:
- You drive around the national average of miles year (10-15k a year)
- You enjoy the security and peace of mind from driving a newer car under factory warranty
- You like something new every three years (very common trend) just for the sake of change
- You need a gas guzzling monster SUV when fuel prices are unstable (anymore they always are)
- You want the most car you can get for the monthly payment
What is the connection with a gas guzzler and leasing? Well, when the gas prices hiked some years back. Lease companies lost their asses because that gas hike just crushed the resale values of any vehicle that was not fuel friendly. You see leases are figured based on a few factors such as your rent charge, initial purchase price, applicable fees in your state, and the residual value which is the calculated amount of depreciation of the car you are leasing based on the miles and term you have chosen. It is this calculated depreciation or residual value that was not foresaw in the years prior to the gas hike. The used SUV market made a big shift while a lot of SUVs and other gas guzzlers were in the middle of their lease. So you have a lot of lease companies getting back their vehicles that are now no where near what they had projected they would be worth at the end of their lease. In turn, losses were so big that a lot of brands pulled their leasing programs all together. A few of your stronger, mostly foreign brands still offer them though. The lesson here is that leasing protects you against swings in the market that could leave you upside-down in equity on a loan. If you were trying to trade in an SUV soon after the hike and you had a loan on it. You were hating life, I guarantee.
Some people just want something new every few years for whatever reason. People like to have warranty on their car and people just like change for the sake of change. I had customers that took out 5 year loans and came back to see me every few years for a new car. In most all cases you are falling behind in equity unless 0% interest is available every time you go to buy. Keep trading in every few years when there is a loan on the vehicle and you are most likely to find yourself upside-down by thousands after a trading a few times. While I am on this subject of trade-ins I would like to point out that if you are upside-down in a car now and you fit the criteria for leasing, there probably is not a more cost effective means of paying down that negative equity if the rent charges are good and your borrowing amount does not exceed the banks limit. When the lease is up, you're all paid up and that negative equity is gone.
There is a simple formula used to calculate leases however to the consumer I think the formula is somewhat irrelevant because most of the variables are already going to be set. As the consumer you are the one who determines the term and mileage allowance which can have great impact on payment. The factors that make it a good lease deal are the price of the vehicle, high residuals, and competitive money factors which on a lease are used in lieu of an APR and determine the "interest" you pay. If you are interested in the formula they cover it pretty well in the link I just left in this sentence. Your only concern of whether it is a "deal" as far as lease are concerned though lies in those three factors I just mentioned. The only factor you can manipulate on a particular vehicle is the purchase price. The residuals and money factors are what they are. So what's a good money factor? I will try to put this in a scale to explain. The further right of the decimal you get, the less interest you pay over the lease.
Money factor .00XXX .000XXX .0000XXX
Standard or mediocre Getting better Hard to pass up
How good of a deal still largely depends on the price they are leasing it to you for. Many dealerships will try to mow over this one but you have every right to know how they got to those figures. While they may be more reluctant than on a purchase. The selling price still needs to be negotiated. I would also like to point out that in most and not all cases any special money factors will be in lieu of any cash rebates. I have seen some special lease cash in the past that a customer could also get with their special money factor. One other little known fact about leases very few consumers know, and this could vary from state to state. In Illinois where I sold the dealerships received credits for the taxes paid on the lease purchase after they are turned in. For example if there was $950 tax paid on a lease. When it is returned that dealer gets that money back and we would apply those tax credits to sweeten a lease deal if we needed to. At the end of a negotiation asking if there are any lease turn in tax credits available would not only probably surprise them for you knowing what they are, but may drop your payment another $20 or better a month. They could only be applied to leases and if I was trying to close someone on a lease and I was out of options I would frequently ask my manager if any were available.
I don't want to go over my miles. What if I get a big scratch or dent in it? I don't want to pay penalties. Then I am stuck with it for three years. Popular deterrents of the lease. Choose miles that are closer to what you think you will drive. Smarter to go over a little than not use what you already paid for. If you have a 45k mile lease and you use 38k. They won't reimburse you. If you go over we are not talking thousands of dollars unless it were absolutely outrageously outside of the allowance you chose. There is also a commitment of term and that is something anyone needs to consider. Most lease programs have guidelines such as an allowance for body damage per panel. $200 a panel is common. Make sure you go over this in the F&I office.
If you think leasing may be an option after reading this tell your salesman you want to see both lease and purchase options. It can't hurt to ask. You may quickly find yourself feeling you have wasted a lot of money over the years especially if you rarely ever keep a car long enough to pay it off. You could easily find yourself looking at vehicles you could normally never afford on a purchase if the residuals are high and the money factors are hot. You might as well rent it from the lease company because right now you're just renting from your bank if you have a loan. After working in the business for some years my feelings on leasing did a complete 180 turn. I would highly consider leasing for my next car purchase given the miles a year I drive. Below I have listed a few pros and cons to leases you must consider for yourself though.
Pros
- Payments can in many cases be kept lower than a purchase if the residuals are high and money factors are good. Allowing you to get more car for your money.
- Choosing a standard term lease you will most likely you be under full warranty for the duration of the lease giving the customer added peace of mind.
- You are protected against swings in the market against the particular vehicle you are driving. Guarding you against unforeseen depreciation that would leave you upside-down in equity on a purchase.
- Leasing gives you the opportunity to have a new car every three years where in the case of purchasing you would likely be taking a substantial loss if you traded this often. Typically equity isn't gained back on a purchase until after the 4th or 5th year of ownershp.
- You do still have the option to purchase the vehicle at the end of your lease if you so choose.
- Great way to pay down on some negative equity you may carry over from a previous vehicle. So long as the borrowing amount remains within the banks allowance. When your lease is over that negative equity is gone and you can start out fresh.
- You are locked in for the term of the lease unless any "early out" specials are made available by the manufacturer.
- You do have mileage and damage limits that you must stay within to avoid penalties at the end of the lease.
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