Leasing a car isn’t for everyone. Some love the noncommittal freedom it gives a lessee to switch cars every few years. Then there are some who think leasing is overpriced, calculated to provide the dealership with a maximum amount of dough while providing a minimum amount of product.
Here’s the thing: Dealers aren’t making the bulk of their money by charging a high monthly payment – that’s often where you, the customer, is “saving” the money on a lease. It’s the regular fees, extra fees, exceptions and stipulations that generate extra revenue for the dealer.
Not sure whether leasing a car is for you?
Let’s do some digging into all the fine print, because the dealer’s definitely in(to) the details.
The cost of leasing a car is based on an agreed purchase price between the customer and the salesperson. Normally, this is the manufacturer’s suggested retail price (MSRP) minus any amount the customer can negotiate down. In other words, it’s based on the amount someone is willing to pay for a long-term rental.
But this also means that the purchase price is negotiable. Before you go ahead and picture yourself behind the wheel of that beautiful new car, you’ll need to find out what the purchase price is and make sure you can afford its monthly payment.
The residual value of a car is an estimated worth at the time its lease ends, and is usually calculated by an average percentage of a model’s depreciation. For example, you leased a car with a purchase price of $35,000 and its estimated worth is $24,850 at the end of the lease term. That means the average depreciation percentage is roughly 29% ($35,000 x 29%) and its residual value is roughly 71% (100% – 29%).
Your monthly lease payment is then calculated based on this number to make up the difference between the current purchase price and what the vehicle is estimated to be worth after the vehicle is returned. However, different lenders calculate residual value differently. For example, some may use an average used-car value from a source like Kelley Blue Book.
If you get a rough idea of what the car’s residual value will be, you’ll be able to estimate your monthly payments.
Capitalized Cost Reduction
Also called the cap cost, this is what the dealer paid for the car from its manufacturer (dealer invoice) minus the residual value. It also depends on the down payment you make on the car.
For example, if the dealer invoice is $25,000 and the residual value is $15,000, the capitalized cost is $10,000. That difference is generally made up in your monthly payments over the life of your lease.
Therefore, capitalized cost reduction – a payment that reduces that $10,000 amount – is your down payment. So, if you’re agreeing to a zero-down lease (meaning your down payment is nothing), your capitalized cost reduction would be $0. Make sure you know what this number is before you sign.
Excess Mileage Fee
Sometimes referred to as a mileage penalty, excess mileage fees are the per-mile amount the dealer charges at the end of your lease that’s over the limit spelled out in your lease agreement. These fees can range anywhere from 10 to 40 cents per mile. If you know you’ll drive a lot, you can prepurchase “extra” miles, then at the end of your lease have any balance refunded for miles you didn’t drive.
Tire Maintenance Fee
Typically, your monthly payment includes maintenance to the car except certain parts like tires. Hence your dealer may try to offer add-ons like tire maintenance or windshield protection fees. Some lease contracts require that you return the tires in pristine condition, so this fee is supposed to help you minimize the risk.
Before doing anything, check to see the cost of these fees, what they cover and whether you believe it’s really worth it. And be sure that all terms and related costs are in writing.
Taxes will differ by state, but some states charge sales tax based on the full purchase price of the vehicle.
Your lease contract will have other fees included that are generally standard and come along for the most part with any car lease.
Also called a document fee, the acquisition fee is paid at the beginning of the lease. As in, you pay a fee for the privilege to lease the car. You’ll also need to pay a disposition fee if you don’t lease another car or decide to buy the car. This fee theoretically covers the dealer’s costs in disposing the car.
If you decide to buy the car after the lease is up, you’ll probably have to pay a purchase option fee instead of the disposition fee. This price can vary depending on the condition of the car, its purchase price and mileage.
There’s also something called a termination fee that’s usually charged if you decide to end your lease early. It can cost you quite a bit, so check the fine print before making a decision.
When you return the car and the dealer deems it to have excessive wear and tear, you could be charged for the depreciation they claim is more than what is allowed in the terms of your contract. Any ding, scratch or stain will also count against you as excessive wear and tear.
Leasing without a Trade-in
Leasing a vehicle without a trade-in may cost you more depending on the situation. When you trade in a vehicle, the value of that car is applied as a down payment to your new lease. It should technically lower your monthly payment.
If you don’t have a trade-in, then your monthly payment could go up. Or if you want to include a down payment, you’ll need to do so with cash instead of using a car. However, if you still have a loan on the vehicle you want to trade in, then your down payment may be lower depending on the outstanding amount you owe. If you owe more than your car is worth, then your monthly lease payment could go up.
How to Decide if Leasing Is the Right Option
Yes, leasing is effectively a long-term car rental, but that doesn’t mean buying a car is the better choice. If you want the luxury of driving a vehicle that’s out of your price range or don’t have the cash to buy a new or used one, then leasing may be your better option.
As well, if you don’t plan on driving a lot, or expect to inflict an excessive amount of wear and tear on your leased vehicle – i.e., you’ll take really good care of it – leasing may be the better choice. If you know you’ll lease again instead of purchasing a vehicle when your contract is up, leasing may be your best bet. And finally, if you like the idea of a new car every couple of years and don’t mind doing your best to preserve it in near-pristine condition, leasing a car could be for you.
Do you typically buy or lease your vehicles? Let us know in the comments below!
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