Auto Leasing 101

[maflynn]

Backstory: So, I was toying with the idea of leasing a new vehicle, not that anything is wrong with my Honda Ridgeline.
I really miss my jeep wrangler and standard transmission and I thought would it make sense to lease a wrangler.

I am a complete neophyte when it comes to the details of a lease. I've started reading up on Edmunds and I'm getting a bit more versed.

I still have some newbie questions.
After the lease is up, say 36 months. You have the option to buy it. How does that work? Is it like buying a used card at that point, i.e., down payment auto loan etc?

Since many leases expect money up front say 3,000, how would getting a new leased vehicle after this one ends? Do I need to come up with 3,000 or would I get some sort of "credit" when turning in my old leased vehicle to get a new leased vehicle.

Lease payments: There seems to be a lot of factors (which can be confusing) that go into the computation and I've heard of complaints regarding this. Specifically, you see advertisements about 199 a month, but then you walk away with 250 or more. What do I need to know to avoid those sort of surprises and/or should I totally ignore those type of ads in the first place?


Is there a rule of thumb type of payment guide, like for every 1,000 dollars you go up in price you can expect to pay x dollars a month, like you see on auto financing?

Other then not owning the vehicle, what are the downsides to leasing? I'm not worried about the mileage quota, I don't put that much on to really be concerned.

 

[zhenya]

Dealers love leasing because they can make really appealing monthly payment numbers and the formulas to compute those payments are complex enough most salesmen won't really know how they work, let alone the customers, so it makes hiding extra charges much harder.

That said, if you do your homework, just as you are doing, leasing can be a really good way of owning a car if you know what you are doing and follow a few guidelines.

First, never put money down on a lease. You want zero down or you don't want it. Any lease can be written with zero down, but they often use large downpayments as a way to advertise a low monthly payment. You don't want to put money down on a lease because if the worst happens and you have an accident with the vehicle early in your ownership, any downpayment is gone. Keep the money in your pocket and pay a higher monthly payment.

Second, learn how to calculate the lease payment yourself. There are plenty of guides online, and even apps you can get on your phone like iLeaseCarPro, so you can quickly verify the numbers that any dealer is giving you. If your dealer is not willing to give you every number that goes into calculating your lease payment, find another dealer. Numbers like the money factor and residual are not secret, but many dealers like to make them secret so they can pad them and prevent customers from really knowing what's going on. The residual is set by the manufacturer and can't be altered by the dealer. The money factor is essentially the interest rate set by the lending arm of the manufacturer, and it may be difficult to find the exact number currently being offered, Edmunds forums sometimes have that info for a particular car - so it can be a place for a dealer to hide profit. You should be able to get close to what the real number is though and find a dealer that is somewhere in the ballpark. The buying price is also important in a lease. Negotiate the selling price exactly as if you were purchasing the car. Walk away from any dealer that tells you this isn't possible. You want the biggest spread possible between MSRP and selling price.

A lease can be purchased by the lessee at any time for whatever the current payoff is calculated at. If you keep it until lease end you have a few choices. You can turn it in and just be done with it, you can buy the car outright for the buyout, which is negotiable. You'll often get a good deal here because the dealer would rather sell to you than have to take the car back prepare it for sale and resell it to someone else. If the residual was calculated poorly by the manufacturer, you have a few options. This could mean that the car is worth a lot less than expected (in which case you should turn it in and let them take the loss, or use this knowledge to your advantage to buy out the vehicle at a lower price if you want to keep it) or it could be worth much more than expected, in which case, if the gap is large enough, you could buy the vehicle for the agreed-upon buyout price and resell it for a profit on your own (or use this as leverage with the dealer for getting a better deal on a new car). This is the advantage of leasing that most pundits miss; the bank takes all of the risk of depreciation off your hands, while leaving you with a lot of options for using that to your advantage.

The downsides are really only if you expect to turn the car in and know that you are really hard on cars. I only suggest leasing for people I know who take pretty good care of their cars because you can get hammered pretty hard for damage or excess wear. So be honest about how you care for your cars in making this decision.

 

[Scepticalscribe]

Dealers love leasing because they can make really appealing monthly payment numbers and the formulas to compute those payments are complex enough most salesmen won't really know how they work, let alone the customers, so it makes hiding extra charges much harder.

That said, if you do your homework, just as you are doing, leasing can be a really good way of owning a car if you know what you are doing and follow a few guidelines.

First, never put money down on a lease. You want zero down or you don't want it. Any lease can be written with zero down, but they often use large downpayments as a way to advertise a low monthly payment. You don't want to put money down on a lease because if the worst happens and you have an accident with the vehicle early in your ownership, any downpayment is gone. Keep the money in your pocket and pay a higher monthly payment.

Second, learn how to calculate the lease payment yourself. There are plenty of guides online, and even apps you can get on your phone like iLeaseCarPro, so you can quickly verify the numbers that any dealer is giving you. If your dealer is not willing to give you every number that goes into calculating your lease payment, find another dealer. Numbers like the money factor and residual are not secret, but many dealers like to make them secret so they can pad them and prevent customers from really knowing what's going on. The residual is set by the manufacturer and can't be altered by the dealer. The money factor is essentially the interest rate set by the lending arm of the manufacturer, and it may be difficult to find the exact number currently being offered, Edmunds forums sometimes have that info for a particular car - so it can be a place for a dealer to hide profit. You should be able to get close to what the real number is though and find a dealer that is somewhere in the ballpark. The buying price is also important in a lease. Negotiate the selling price exactly as if you were purchasing the car. Walk away from any dealer that tells you this isn't possible. You want the biggest spread possible between MSRP and selling price.

A lease can be purchased by the lessee at any time for whatever the current payoff is calculated at. If you keep it until lease end you have a few choices. You can turn it in and just be done with it, you can buy the car outright for the buyout, which is negotiable. You'll often get a good deal here because the dealer would rather sell to you than have to take the car back prepare it for sale and resell it to someone else. If the residual was calculated poorly by the manufacturer, you have a few options. This could mean that the car is worth a lot less than expected (in which case you should turn it in and let them take the loss, or use this knowledge to your advantage to buy out the vehicle at a lower price if you want to keep it) or it could be worth much more than expected, in which case, if the gap is large enough, you could buy the vehicle for the agreed-upon buyout price and resell it for a profit on your own (or use this as leverage with the dealer for getting a better deal on a new car). This is the advantage of leasing that most pundits miss; the bank takes all of the risk of depreciation off your hands, while leaving you with a lot of options for using that to your advantage.

The downsides are really only if you expect to turn the car in and know that you are really hard on cars. I only suggest leasing for people I know who take pretty good care of their cars because you can get hammered pretty hard for damage or excess wear. So be honest about how you care for your cars in making this decision.

That is an extremely interesting very well written and exceptionally informative post. Thank you for taking the time and trouble to post it.

 

[Apple fanboy]

All I would add is look at the cost of a lease verses a loan. With a loan at the end of the term, the car is yours to sell of keep.
With a lease you still have to make a payment at the end.
I think the basic premise with a lease is you get used to paying out monthly costs. So when your lease is up, you just end up taking out another one because you won't miss the 200-400 dollars a month.
Of course they then up sell you to a better car and it's only 50 dollars more a month. So then your just forever increasing your outgoings.
Personally I just buy second hand (so I don't take the biggest depreciation hit), then sell them after a few years.
Yes I don't drive the latest and greatest, but I do get to live debt free.

 

[S.B.G]

Specifically, you see advertisements about 199 a month, but then you walk away with 250 or more. What do I need to know to avoid those sort of surprises and/or should I totally ignore those type of ads in the first place?

I say ignore those adverts altogether and expect that one would almost never drive off a lot with a price like that. When I leased my current car I asked my dealer about those and he just shook his head and said "Only in a perfect world. No one gets those kinds of deals ever."

Even with my Ford Motor Company family discount and great credit I couldn't get a deal like $149 per month or whatever. I don't know how they get away with advertising that stuff.

Otherwise, leasing has been a great option for me. I've leased the last two cars and previous to that financed everything else. Now, I have a brand new car with a full warranty for the duration of the lease and don't have to worry about major maintenance of any kind; just change the oil and whatnot. Essentially, I don't need to worry about anything when the warranty runs out and the miles get high because I won't have the car by then.

 

[mobilehaathi]

Yes I don't drive the latest and greatest, but I do get to live debt free.

The value of this can not be understated.

 

[maflynn]

Dealers love leasing because they can make really appealing monthly payment numbers and the formulas to compute those payments are complex enough most salesmen won't really know how they work, let alone the customers, so it makes hiding extra charges much harder.

Thanks for such a great and detailed write up.

I say ignore those adverts altogether and expect that one would almost never drive off a lot with a price like that. When I leased my current car I asked my dealer about those and he just shook his head and said "Only in a perfect world. No one gets those kinds of deals ever."

Yeah, that's been my thinking. I'm not sure if I'm willing to go the lease route, or even replace my truck,but I do want do my homework

 

[0388631]

Terms and payment vary wildly. There is no clear cut formula that you can apply for every car out there, wherein x equals y if z remains the same. If you're set on a stick Wrangler, you may want to look at a pre-owned one if you're fine with that. It'll have taken the depreciation hit already, and you'll be able to buy a relatively "new" Wrangler for less.

 

[A.Goldberg]

How long do you plan on keeping the Wrangler? Just a few years? Wranglers tend to have phenomenal resale value as they're desirable. You might want to do the math on just buying the car and selling in X# of years instead of a lease, factoring in financing if that's the route you're taking. Not sure if they're offering financing deals on the Wrangler.

I don't think anyone has mentioned the mileage limitation. Beware of that, a lot of people run into problems with that.

 

[deany]

Dealers love leasing because they can make really appealing monthly payment numbers and the formulas to compute those payments are complex enough most salesmen won't really know how they work, let alone the customers, so it makes hiding extra charges much harder.

That said, if you do your homework, just as you are doing, leasing can be a really good way of owning a car if you know what you are doing and follow a few guidelines.

First, never put money down on a lease. You want zero down or you don't want it. Any lease can be written with zero down, but they often use large downpayments as a way to advertise a low monthly payment. You don't want to put money down on a lease because if the worst happens and you have an accident with the vehicle early in your ownership, any downpayment is gone. Keep the money in your pocket and pay a higher monthly payment.

Second, learn how to calculate the lease payment yourself. There are plenty of guides online, and even apps you can get on your phone like iLeaseCarPro, so you can quickly verify the numbers that any dealer is giving you. If your dealer is not willing to give you every number that goes into calculating your lease payment, find another dealer. Numbers like the money factor and residual are not secret, but many dealers like to make them secret so they can pad them and prevent customers from really knowing what's going on. The residual is set by the manufacturer and can't be altered by the dealer. The money factor is essentially the interest rate set by the lending arm of the manufacturer, and it may be difficult to find the exact number currently being offered, Edmunds forums sometimes have that info for a particular car - so it can be a place for a dealer to hide profit. You should be able to get close to what the real number is though and find a dealer that is somewhere in the ballpark. The buying price is also important in a lease. Negotiate the selling price exactly as if you were purchasing the car. Walk away from any dealer that tells you this isn't possible. You want the biggest spread possible between MSRP and selling price.

A lease can be purchased by the lessee at any time for whatever the current payoff is calculated at. If you keep it until lease end you have a few choices. You can turn it in and just be done with it, you can buy the car outright for the buyout, which is negotiable. You'll often get a good deal here because the dealer would rather sell to you than have to take the car back prepare it for sale and resell it to someone else. If the residual was calculated poorly by the manufacturer, you have a few options. This could mean that the car is worth a lot less than expected (in which case you should turn it in and let them take the loss, or use this knowledge to your advantage to buy out the vehicle at a lower price if you want to keep it) or it could be worth much more than expected, in which case, if the gap is large enough, you could buy the vehicle for the agreed-upon buyout price and resell it for a profit on your own (or use this as leverage with the dealer for getting a better deal on a new car). This is the advantage of leasing that most pundits miss; the bank takes all of the risk of depreciation off your hands, while leaving you with a lot of options for using that to your advantage.

The downsides are really only if you expect to turn the car in and know that you are really hard on cars. I only suggest leasing for people I know who take pretty good care of their cars because you can get hammered pretty hard for damage or excess wear. So be honest about how you care for your cars in making this decision.

Fantastic post, but in your first paragraph I guess you mean 'harder to notice.'

 

[maflynn]

You might want to do the math on just buying the car and selling in X# of years instead of a lease,

While seemingly in conflict with each other, I'd like to have lower payments then I have for my truck, so leasing seems to be a nice solution in that endeavor

I don't think anyone has mentioned the mileage limitation. Beware of that, a lot of people run into problems with that.

I mentioned it in my OP, but only in passing. My driving habits are such that I'm not really worried about that limitation.

I may wait until August to finally pull the trigger, as dealerships may be a bit hungrier to offload the 2016 models, though the Jeep is in good demand, so that may not help me.

 

[S.B.G]

While seemingly in conflict with each other, I'd like to have lower payments then I have for my truck, so leasing seems to be a nice solution in that endeavor

Yeah, I put a down payment on my leases for the lower monthly's as well. I have an almost fully loaded 2016 Ford Focus SE for $255 per month. I only put $1,800 down and that knocked a few bucks off on a 3-year lease. I went with the low mileage option of 10,500 miles per year and after 8 months of owning it I only have 3,500 miles on it.

 

[maflynn]

Yeah, I put a down payment on my leases for the lower monthly's as well.

Buy or lease, I will not take the plunge unless my payments are lower. While I don't consider what I'm paying crippling, but in the name of being a good steward with my funds, I'll walk away from any deal that means more money out of my pocket.

 

[deany]

Buy or lease, I will not take the plunge unless my payments are lower. While I don't consider what I'm paying crippling, but in the name of being a good steward with my funds, I'll walk away from any deal that means more money out of my pocket.

Hi
As insurance companies dont pay the full value of the vehicle in the event of an accident we have whats called GAP in the UK
https://www.abi.org.uk/Insurance-an...~/media/16515033DA6341D0A4FB00ED908528B7.ashx
To cover the shortfall. It is an additional cost but it just covers us 100%
Do you guys have that in the States and is it something to consider?

 

[jbachandouris]

All I would add is look at the cost of a lease verses a loan. With a loan at the end of the term, the car is yours to sell of keep.
With a lease you still have to make a payment at the end.
I think the basic premise with a lease is you get used to paying out monthly costs. So when your lease is up, you just end up taking out another one because you won't miss the 200-400 dollars a month.
Of course they then up sell you to a better car and it's only 50 dollars more a month. So then your just forever increasing your outgoings.
Personally I just buy second hand (so I don't take the biggest depreciation hit), then sell them after a few years.
Yes I don't drive the latest and greatest, but I do get to live debt free.

I just leased my car. My biggest reason was that I owed $12000 and the car was only worth $5500. The original car was consigned with mother and I didn't want that. Without at least $6000 down, a buy was out of the question. At this point, I'm no longer upside down, but the temptation to lease again is something I will have to fight.

I see the Next program with cell phones the same way. I'd ignore the iPhone 7, but with Next, I just hand them my phone and get the new one. No hassle trying to sell my old one. Not very profitable, but all too convenient.

 

[S.B.G]

Do you guys have that in the States and is it something to consider?

Yes, we have options for gap insurance here too. I bought that on a 2003 Ford F-150 and that was the only time I did so. I think I was just talked into it as a young buyer. I don't buy it anymore because, to me, the cost to risk ratio is too high to be of value to me. I have a clean driving record and no at-fault accidents and my commute is 2 miles so I feel confident that I won't be in a crash that totals my car.

 

[maflynn]

I don't buy it anymore

I never took the plunge, I was offered that once and I declined it.

 

[deany]

Yes, we have options for gap insurance here too. I bought that on a 2003 Ford F-150 and that was the only time I did so. I think I was just talked into it as a young buyer. I don't buy it anymore because, to me, the cost to risk ratio is too high to be of value to me. I have a clean driving record and no at-fault accidents and my commute is 2 miles so I feel confident that I won't be in a crash that totals my car.

Hi Sandbox

The excellent post by zhenya mentions a recommendation of ZERO deposit surely then without GAP if the vehicle was written off then there would be a 'shortfall' to pay. I guess we are all talking new here.
So 'yes' to zero deposit
But 100% 'yes' to GAP to avoid any nasty surprises, surely?
[doublepost=1465909174][/doublepost]

Dealers love leasing because they can make really appealing monthly payment numbers and the formulas to compute those payments are complex enough most salesmen won't really know how they work, let alone the customers, so it makes hiding extra charges much harder.

That said, if you do your homework, just as you are doing, leasing can be a really good way of owning a car if you know what you are doing and follow a few guidelines.

First, never put money down on a lease. You want zero down or you don't want it. Any lease can be written with zero down, but they often use large downpayments as a way to advertise a low monthly payment. You don't want to put money down on a lease because if the worst happens and you have an accident with the vehicle early in your ownership, any downpayment is gone. Keep the money in your pocket and pay a higher monthly payment.

Second, learn how to calculate the lease payment yourself. There are plenty of guides online, and even apps you can get on your phone like iLeaseCarPro, so you can quickly verify the numbers that any dealer is giving you. If your dealer is not willing to give you every number that goes into calculating your lease payment, find another dealer. Numbers like the money factor and residual are not secret, but many dealers like to make them secret so they can pad them and prevent customers from really knowing what's going on. The residual is set by the manufacturer and can't be altered by the dealer. The money factor is essentially the interest rate set by the lending arm of the manufacturer, and it may be difficult to find the exact number currently being offered, Edmunds forums sometimes have that info for a particular car - so it can be a place for a dealer to hide profit. You should be able to get close to what the real number is though and find a dealer that is somewhere in the ballpark. The buying price is also important in a lease. Negotiate the selling price exactly as if you were purchasing the car. Walk away from any dealer that tells you this isn't possible. You want the biggest spread possible between MSRP and selling price.

A lease can be purchased by the lessee at any time for whatever the current payoff is calculated at. If you keep it until lease end you have a few choices. You can turn it in and just be done with it, you can buy the car outright for the buyout, which is negotiable. You'll often get a good deal here because the dealer would rather sell to you than have to take the car back prepare it for sale and resell it to someone else. If the residual was calculated poorly by the manufacturer, you have a few options. This could mean that the car is worth a lot less than expected (in which case you should turn it in and let them take the loss, or use this knowledge to your advantage to buy out the vehicle at a lower price if you want to keep it) or it could be worth much more than expected, in which case, if the gap is large enough, you could buy the vehicle for the agreed-upon buyout price and resell it for a profit on your own (or use this as leverage with the dealer for getting a better deal on a new car). This is the advantage of leasing that most pundits miss; the bank takes all of the risk of depreciation off your hands, while leaving you with a lot of options for using that to your advantage.

The downsides are really only if you expect to turn the car in and know that you are really hard on cars. I only suggest leasing for people I know who take pretty good care of their cars because you can get hammered pretty hard for damage or excess wear. So be honest about how you care for your cars in making this decision.

Hi zhenya

Excellent post can you confirm you recommend GAP insurance with every new lease to avoid paying any shortfall due to zero deposit. In the event of an insurance write off?

thanks

 

[S.B.G]

Hi Sandbox

The excellent post by zhenya mentions a recommendation of ZERO deposit surely then without GAP if the vehicle was written off then there would be a 'shortfall' to pay. I guess we are all talking new here.
So 'yes' to zero deposit
But 100% 'yes' to GAP to avoid any nasty surprises, surely?

Those are all choices each buyer/lessee needs to consider for themselves and their budget. I prefer to add a down payment to lower my monthly and won't buy gap insurance.

 

[zhenya]

Hi Sandbox

The excellent post by Zhenya mentions that he recommends ZERO deposit surely then without GAP if the vehicle was written off then there would be a 'shortfall' to pay. I guess we are all talking new here.
So 'yes' to zero deposit
But 100% 'yes' to GAP to avoid any nasty surprises, surely?

In the US, gap coverage of some kind is generally required by the lending firm and built into the price of the lease since it's really protecting the lender who retains title, not you who are merely leasing. If you want it for a purchase, check with your insurance company who almost certainly offers the same coverage the dealer is offering without the inflated price tag.

 

[deany]

In the US, gap coverage of some kind is generally required by the lending firm and built into the price of the lease since it's really protecting the lender who retains title, not you who are merely leasing. If you want it for a purchase, check with your insurance company who almost certainly offers the same coverage the dealer is offering without the inflated price tag.

Hi zhenya

I guess though its important for buyers to ensure there is no possibility of a 'shortfall' in the event of an accident & GAP for the vehicle is in place before signing the lease contract?

So the buyer is 100% covered, & therefore no nasty suprises.

thanks

deany
[doublepost=1465909993][/doublepost]

Those are all choices each buyer/lessee needs to consider for themselves and their budget. I prefer to add a down payment to lower my monthly and won't buy gap insurance.

Hi sandybox
but the deposit would be high enough to cover depeciation so no 'shortfall' no need for GAP if written off.
thanks
deany

 

[yg17]

Yes, we have options for gap insurance here too. I bought that on a 2003 Ford F-150 and that was the only time I did so. I think I was just talked into it as a young buyer. I don't buy it anymore because, to me, the cost to risk ratio is too high to be of value to me. I have a clean driving record and no at-fault accidents and my commute is 2 miles so I feel confident that I won't be in a crash that totals my car.

Unless you're making a large enough down payment so that you'll never be upside down on the loan, not having GAP is a huge mistake. You may have a clean driving record, but there are plenty of idiots out there on the road, and if they wreck your car, you'll be responsible for the difference between the insurance payout and the loan amount, even if it was 100% their fault.

Of course, the ideal thing to do is put enough down so that you won't be upside down. If you're buying a new car with $0 down, you probably shouldn't be buying a new car (leasing is different, the less you put down the better).

 

[deany]

But always have GAP for leasing to, if the inital deposit is low.

 

[heehee]

Residual value of the car is very important as well. Basically a guessing game of what the car will be worth at the end of the lease term according to the manufacture/bank. My car they put it at 64% after 39 months, my month payment is less than another brand that has the same MSRP.

 

[Apple fanboy]

I never took the plunge, I was offered that once and I declined it.

I get offered this every time I buy, even though I never finance the car (cash buyer).
I think it's because the salesperson make commission on signing you up.