The Advantages and Complexities of Leasing

12 Month Auto Lease Advantages

Traditional leasing isn’t the same as renting a vehicle, or at least not as consumers may possibly understand the process. Additionally, leasing isn’t much costlier. In reality, once you consider it, making use of a 12-month lease on your vehicle can, in fact, save you considerably more money in the long term when compared with buying a car using a car loan.

When you buy a car or truck, you usually are required to make a down payment. If the car you are purchasing is a better quality vehicle, your investment will easily be $25.000 range, at a minimum. In situations where this much cash is called for, financing the purchase will be a favored method for you to purchase the car from any dealer. For the purposes of this discussion, we will assume you obtain a $25,000 loan for the vehicle. The downside to doing this is that it becomes an obligation you are committed to until you pay it off, or trade it in.forms-bill-of-sale

Once again, let’s assume that you execute a contract for 5 year repayment term, and with a 9% interest rate. Some fairly simple math will confirm that you will you’ll pay $2500 more than the vehicle is worth. In the meantime, the car will suffer depreciation which will conservatively be as large an amount. This would equate to a monthly payment of around $450.

Conversely, leasing exactly the same vehicle for 12 months will result in the repayments not exceeding the dollar amount of the depreciation. When the actual depreciation stays consistent, this will amount to approximately $600. Dividing this amount into 12 months, the fee is $466. This amounts to a few dollars more than amount of your loan.

Remember that you don’t need to continue to make payments for 12 months. It is possible to return to the dealership and order the very same vehicle again – only this car or truck will be brand-new and available for virtually the same contract.

As a result of using some simple arithmetic, in contrast to paying $27,500 dollars for a vehicle which will depreciate and gradually wear-out over 5 years – you can instead elect to pay $5,600 during the course of one year, which result in a savings of over $20.000

An additional huge advantage to leasing a vehicle for 12 months is that you will be covered by the manufacturers’ warranty for the duration of ownership.  Consequently, regardless of what happens to the vehicle, you’re protected. There is no need to own or drive a vehicle aged 5-7 years old. With the very same funds, you can buy a new vehicle every year, and spend nearly exactly the same, and even less in some instances. Taking the time to research the marketplace for competitive leasing companies pays off, because you can easily obtain a top notch package every time.

The handful of drawbacks to leasing is not really sufficient for it to become a disadvantage. Among the few, is that the vehicle will be limited to a driving interval which is typically between 12.000 – 15.000 miles per year. If you’re planning on traveling more than this, you really should reconsider leasing; it can be expensive when you exceed the mileage threshold you agree to. You can pay as much as 25 cents for each extra mile you exceed it by.


The Complexities of Car Leasing

When it comes to leasing a vehicle, one common question is “can I negotiate?” Those who didn’t know any part of leasing was negotiable just got a little happier, yes there is a portion of your lease that will or should be negotiable, the vehicle price. The dealer has direct control over this one component. All other areas are typically out of their hands and up to the leasing company, whom they do not control. On an extremely rare occasion, a leasing company will give a dealer authorization to negotiate some other areas that they typically have total control over themselves like money factor, residual value, security deposit, down payment, and acquisition fees. However, don’t expect to haggle when it comes to these things, as I stated, that is a rare (practically never) occurrence.

Money Factor: If you’re wondering what the term money factor means, a simplistic description is it establishes the amount you will pay in finance charges over the life of your lease. Ultimately, it is the configuration of the cost-of-money finance rate. Sometimes money factor is referred to as the lease factor. A high money factor equals a large monthly payment and you can anticipate a sizeable payment in finance charges. It is imperative to be patient and seek out the lowest money factor obtainable. This task is only difficult because it is not mentioned by the dealer and often not exposed in most contracts! You have to ask the dealer directly what the money factor is and if they refuse to discuss it, find another dealer.

If and when you find the dealer who will talk about a car lease money factor, the other issue is appearances. While you may get a number like .00275 and think it’s almost non-existent, in reality that figure has to be converted to an interest rate also known as the Annual Percentage Rate (APR). This is configured by multiplying 2400 yields with .00275 equaling 6.6% APR. If you’re fortunate enough to get a number that makes more sense to you like 2.75, don’t get too excited; that’s just their way of displaying .00275! So spare yourself a headache and when you’re given that low sounding figure ask them what that number will be as a percentage (i.e., 6.6% APR).new-car-old-car

Residual Value: A dealer may use this term frequently while you stand wondering what it means. Residual value defines the value of something that has been used for a length of time. In car leasing it will directly affect your monthly payments. It is also part of the configuration used by the leasing company for the amount you’ll pay if you decide to purchase the vehicle at the end of the lease, and it is incorporated to establish the penalty you incur if you break your lease prematurely.

Known as the “depreciation” your vehicle experiences over the life of your lease, the leasing company is responsible to guesstimate how much of the car’s value you will be using over the course of the lease, the “residual value.” This figure directly contributes to your monthly payments because they are calculated based on the residual amount divided by the number of months you lease, and then broken down into a monthly payment excluding fees, interest and taxes (FIT). So if you had a 24-month lease and the estimation of your end lease residual amount is $26,000, your monthly payments will reflect the $11,000 used over the 24 month period (in other words, divided by 24 months) and broken down to average the monthly payment which in this case is approximately $458.3 (FIT excluded).

Security Deposit: Your security deposit can be figured out in relation to your monthly payment amount. If your monthly payment were $525, your security amount would be $550 (the amount is rounded up and based on increments of $50).

Down Payment: In order to reduce the amount owed on a lease, a down payment is typically offered or suggested. Often referenced as Capitalized Cost Reduction (Cap Cost Reduction). This can substantially reduce the monthly payment, however most of it will be put toward the tax, fees for the title and other fees incurred during the first month, in addition to the monthly payment itself.

The terms due upon lease inception or drive out cash has nothing to do with your down payment and may not be included. Ultimately, the amount you put down as a down payment might see a 50% reduction after fees have been withdrawn. A cash payment of $5,000 upfront will have the security deposit and other fees deducted from it in addition to the first month’s payment. So the cap cost reduction could be as low as $2,500, not the initial $5,000 you paid upfront.

Since a down payment is not typically required in leasing a vehicle, it might be in your best interest to not offer one. The disadvantages of including it are numerous and may potentially outweigh the advantages. If the vehicle is wrecked, or stolen before the end of the lease, your down payment may not be recouped in your insurance settlement.

Acquisition Fees: An administrative fee is included in every car lease, aka acquisition fees, assignment fees, or bank fees. You’ll see this explained in your lease contract though right? Not necessarily, most contracts have no mention of this fee since it is a direct charge from the lease company and not your dealer. If it makes you feel any better, your dealer doesn’t see any of the proceeds from this charge (unless the leasing company is extending part of it as a bonus for the business, but this is not typical).

This amount is based on numerous factors including where you live. Someone leasing in New York City will have a higher fee than someone leasing in a more remote city or town; in addition, the more luxurious your car (expensive) the higher the amount. While the fee is often included in “capitalized cost” it is otherwise not often disclosed and considered a “hidden fee.” If you’re required to pay the acquisition fee upfront, a positive will be the itemized list of capitalized cost provided to you within your contract.

Independent Leasing Companies – The Direct Bank Lessor: true-market-valueLeasing a car or truck has become one of the payment vehicles of choice in today’s economic climate. It is particularly favored mainly because it provides an appealing way to drive a new vehicle which you might not be able to afford through typical financing programs; it may not otherwise be affordable.

Leasing places, you in a unique position – it enables you to make more affordable monthly payments as compared to conventional automobile finance loans. In today’s market, approximately one out of every four vehicles being driven by motorists in the United States is actually leased.

The typical perspective of most automobile purchasers is that the dealership from which the car is purchased from is also doing the lion’s share of the leasing; this is rarely the case. The vast majority of dealer’s function as intermediaries – brokers and middlemen – for the car maker’s finance company or third-party bank or lending institutions. While it may certainly be possible to lease your vehicle from the local car dealership, you can likely save money by leasing through an independent leasing company or even directly through a bank.

Most dealers typically view leases as additional tools to help aid them in making the sale. The dealership wants to shift the thinking of a prospective buyer from one that is centered on the selling price of the vehicle to a focus on the monthly payment amount. This shift is logical for the dealer to do – the monthly installments will always be a small fraction of the selling price. Leasing allows them a great deal of latitude in making the vehicle seem affordable by being able to vary lease terms that may include: time, rate, mileage allowances and other factors.

Independent Leasing Companies: Every metropolitan area has its own stand-alone, non-affiliated leasing company that can offer leasing solutions to a wide range of purchasers that can also be corporate fleet customers. These businesses and their leasing agents will always be in the role as brokers or middle men; the approvals of the actual financing will always be provided by a bank or other lending institution specializing in these kinds of purchase arrangements.

The Direct Bank Lessor: Leasing directly from a bank is sometimes beneficial. When this option is deemed best for you, there are no middle men; your contact and the leasing will be done one on one with the bank. There will usually be numerous banks and other financial institutions that can offer a leasing product that will meet your guidelines for monthly payment amounts, term and all of the other considerations.

It is also important to note that a third-party lessor will not usually sell your lease agreement to a bank. They are authorized as the leasing company with the vehicle manufacturer, which means they have complete access to all of the information about the vehicle – this includes wholesale confidential pricing. When you combine this capability the lower costs of the funds, they are often in the best position to offer you a lease at the lowest possible cost.