New Car Leasing Guide
Learn to Talk the Talk
Before You Walk the Walk
New car leasing is not as confusing as it may first appear to be. It's really not too much different than buying a car, but it does require you to learn the terminology in order to avoid getting ripped off.
I forgot who it was that said it, but it was one of those brilliant money maker types...
Buy appreciating assets and
lease depreciating assets!
Depreciating assest? Sounds like an oxymoron to me. Really a car could be considered a bit of a liability (maybe more than a little bit). Therefore, new car leasing could be a very wise way for you to finance your next vehicle.
A lot of what should be taken into consideration when considering whether to lease or buy will come down to your personal preferences and personal habits.
Let's start our adventure in new car leasing by learning to talk the talk, and below that you'll find some additional leasing tips to stimulate your brain....
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I know the following is probably not the most interesting subject in the world, but if you want to learn how new car leasing works and do not want to get completely run over by the dealer, then this is some important stuff to know.
Imagine you were presented with a contract written in Japanese (assuming you don't read Japanese) and all you could make out were the figures.
Do you think it would be possible for an unsavory Finance Manager to hide money?
Create imaginary fees that fatten his or her pocket?
Chances for getting scammed are pretty high here, wouldn't you agree?
On the other hand, what if the Finance Manager was a very honest person, but didn't quite understand lease terminology themselves? What if they were to explain something wrong, which led to you overpaying $500, $1000 or more?
Trust me, it's well worth your time to learn to talk the talk, before you walk the walk!
When you're finished here, be sure to make the dealers compete for your business. Yahoo! Autos provides an excellent way to do just that, make them compete! Fill out one quote request and get up to four competing offers fast and free. Use the tool just below to see what I mean...
Capitalized Cost (Cap Cost)
The Capitalized Cost is a really fancy way of saying the cash sales price. The cash sales price will also include any accessories added to the car at the time of sale (custom wheels, spoiler, CD changer, running boards, etc.)
Gross Cap Cost
The Gross Cap Cost is the cash sales price including any after market products (vehicle extended warranty, GAP insurance, paint/fabric treatments, alarm, etc.) and any fees, like up front taxes, acquisition fees, etc. the lessee pays for in the lease payment.
Cap Cost Reduction
Cap Cost Reduction is another fancy term used with new car leasing that describes your down payment. This can come in the form of cash, trade equity or rebates. Any one or all of these are applied towrads the lease to reduce the Gross Cap Cost.
Lease Rate Factor
The Lease Rate Factor, also known as the Money Factor, would be similar to the APR for a vehicle you were buying. Although it is similar it is expressed differently. For instance, a Money Factor of .0035 would be the equivalent of an 8.4% APR. You can figure this by multiplying the .0035 by 2400.
The Depreciation is a figure that determines the charge against the cost of the vehicle for estimated wear and tear over the term of the lease. This will be broken out on the lease as a fee that you the consumer pays as a part of each of your scheduled monthly payments.
Hard Adds are accessories added to the car that have a guaranteed future value. This is more for the finance department and the lender to help to determine the true lona to value, but it is also important to you the consumer, because these adds are residualized.
Just the opposite of a Hard Add, a Soft Add has no guaranteed future value. Again, this is not all that important for you as a consumer to understand.
Drive Offs / Inception Fees
You hear these terms quite often in TV commercials promoting new car leasing. It typically comes during the really fast disclaimer section at the end of the commercial. $199 for 36 months, credit and other factors will determine approval, $2386 due at drive off, or due at signing.
These terms are used to describe the total cash due at signing to cover the first months payment, a refundable security deposit, the first years license, title and registration fees and an optional cap reduction with tax.
This is not always mandatory to cover those fees up front and if the lender is okay with it new car leasing is possible with zero cash upfront, OAC. You'd simply roll the fees into the lease.
Security Deposits are required on all new car leases except where prohibited by law. Security deposits are typically the equivalent of one monthly payment rounded to the next highest $25 increment.
In states where they are not applicable, the last month's rent is to be paid in advance.
Here's an easy one, this is you the consumer.
Here's another easy one, this is the lender, or in other words the legal owner of the car.
Every lease payment is made up of three things and each should be clearly disclosed on the new car leasing contract.
- Monthly Rent Charge
- Monthly Tax
This is the guaranteed future value of the car. Basically, assuming only normal wear and tear and no excess mileage, you will get no less than this for the car at lease end. This is a very important value with new car leasing, so it's important to read and possibly reread this paragraph.
If the car is worth more, than you can trade it in and use the equity towards your new car.
If it is worth less, than let the lender worry about that, because it's not your responsibility. This is a huge benefit of new car leasing!
This is also the amount you'd use to determine your payoff at the end of the lease if you wanted to buy the car.
The higher the Residual Value, the lower your monthly payments will be.
This is simply the process of establishing the future value of a car and its "value-added" accessories.
This is similar to a regular purchase in that it represents the term of the loan and/or the lease. Most leases fall into the 24-66 month range, with somewhere in the 36-48 month range being the most common.
Additional Car Leasing Tips
Taxes and how they are paid is a great benefit of new car leasing. You will only pay taxes on the portion you use. An example would be "buying" a $30,000 car and paying taxes (at 8%) of $2,400.
With a straight purchase you'd pay the full $2,400 whether you kept the car for 6 years or 6 days. With a new car lease on the same vehicle and let's say a 50% Residual Value you'd only pay half the tax and therefore save $1,200.
New car leasing is typically only an option available to customers with above average to excellent credit ratings. I'm not exactly sure why this is the case, but it is. You'll typically need:
- A 680 credit score or higher
- Have either prior well paid auto loans or leases
- A credit history (well paid) of five years or greater
- A steady employment history
- a monthly income in excess of $2,500.
A closed-end lease is the only type of new car lease I recommend. These are also sometimes referred to as "Walk Away" leases. This means at lease end you will simply turn the car in and not have to worry about additional fees, except any damage (not deemed "normal" wear and tear) and any excess mileage fees.
Say No to Open-End Leases
These are the types of leases that gave new car leasing a bad name. Stay away from these types of lease as you will be responsible for difference between the Residual Value and the true market value at lease end.
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