I probably shouldn’t call leasing a car a scam, but it definitely can seem like it sometimes. Like so many transactions these days, car lease agreements are calculated to provide the dealership with a maximum amount of dough while providing you with a minimum amount of product/service. So what else is new, you say? Well, let’s do some digging into all the fine print, because the dealer’s definitely in[to] the details.
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. It’s the regular fees, extra fees, exceptions and stipulations that generate the extra revenue.
Full disclosure: I don’t lease and probably never will, but I know there are a lot of people that do, and I do think you can lease a car without getting burned – if you know how to avoid the extra costs and fees that is.
This post is supposed to be about leasing a car, so why is the first thing I talk about buying a car? Because the cost of leasing a car is still based on its purchase price – how much the car is deemed to be worth.
It’s important to understand that there is no automobile god who objectively sets the absolute value of a car. It’s worth however much someone is willing to pay for it. This means that the purchase price is negotiable. Don’t even think about picturing yourself behind the wheel of that beautiful new car until you’ve found out what the purchase price is … and then haggled it down a bit.
The residual value of a car is how much it will be worth after your lease is up. This is often calculated as a percentage of depreciation. The monthly lease payment is figured to then make up the difference between the current purchase price and the depreciated purchase price after you give the car back, but different lenders calculate residual value differently – an average used car value from something like the Kelley Blue Book, for example, is sometimes used as well.
So, if you agree on an exact purchase and you get a rough idea of what the car’s residual value will be, you’ll have an idea of what the dealer should (and should not) be charging you for the monthly payment.
Capitalized Cost Reduction
The capitalization cost is what the dealer paid for the car minus the residual value. For example, if the purchase price of your lease vehicle is $25,000 and the residual value is $15,000, the capitalized cost is $10,000. That difference is what your lease payments are supposed to make up. A capitalized cost reduction – a payment that reduces that $10,000 amount – is your down payment. So, if you’re getting a $0 down lease, your capitalized cost reduction should be $0. Make sure you’re both clear on what this is before you sign.
Excess Mileage Fee
Mileage fees can be anywhere from 10–40 cents a mile. One of our Zing authors discusses what happens when you go about 3,000 miles over your allotted amount.
Tire Maintenance Fee
Are you being offered a tire maintenance fee? Why? What does it cover? Your dealer might also offer things like windshield protection and other maintenance fees. How much are they and what exactly do they cover? Are they really worth it?
Taxes will differ by state, but some states charge sales tax based on the full purchase price of the car.
Also called a document fee, the acquisition fee is paid at the beginning of the lease and can be several hundred dollars. Basically, you have to pay to get the car before you pay to drive the car. Then, there’s the 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 of the car. This can also be several hundred dollars.
If, after finishing your lease, you decide to buy the car, you’ll probably have to pay a purchase option fee instead of the disposition fee, and this too could be several hundred dollars depending on your deal.
There’s also something called a termination fee that’s usually charged if you decide to end your lease early. Find out how much it is and exactly how it works.
If you don’t keep up on the regular maintenance and the dealer finds this out, they may charge you for excessive wear and tear on the vehicle. Any ding, scratch or stain will also count against you as excessive wear and tear.
New York Times CIO Marc Frons offers some good advice in his in-depth post on his first (and quite costly) leasing experience.
“First, decide exactly what vehicle you want, including color, interior, options, etc., and make sure the dealer has one in stock or can get one before discussing any numbers. Then, make the dealer give you all the numbers up front, not just the monthly payment, but everything on the contract you will eventually sign. Get a copy of that agreement if you can, or barring that, get everything in writing.”
He also suggests you shouldn’t plan on driving away with a car the first time you visit a dealership. If they don’t appear willing to negotiate some of the costs with you, be prepared to get up and walk out – you’ll almost never make it to the door without the salesperson becoming at least somewhat more amenable.
If, at this point, you’re feeling pretty well talked out of leasing a car, don’t worry. It’s still an option for you if you do your research, are prepared to negotiate all of the different costs and fees and won’t allow yourself to get “guided” into a deal you don’t want.
Is this your first time leasing a car, or are you an old pro? Did you have to learn the hard way how to get a good lease deal? Share your experiences and insight below!
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