Before you buy a car, you must understand how leasing works in order to determine how the value of your car will depreciate and if you are getting the best deal when financing your car purchase. Leasing is the typical alternative to buying a car outright and in times of economic contraction, where low-interest financing is not available, leasing has grown tremendously as an option for car buyers. Before leasing a car, it is important to understand in full the terms and conditions of the lease, its cost to you and the value of the car you are leasing.
Incomplete information in any aspect of the leasing a car process will put the potential buyer at a disadvantage and ensure the deal will not be in the buyer’s interest.
Necessary terms to know for those leasing a car
MSRP – Manufacturers Suggested Retail Price is the base cost of the car, before fees, taxes and other costs of the sale. Additional features to the car are reflected in the MSRP.
Negotiated price – you are not always paying the MSRP when buying or leasing a car. You may come to an agreement with the dealer that involves certain additions, terms or agreements that lower this price. You will need this figure when determining if you should lease the car. You may be able to negotiate some dealer fees, but you will not be able to negotiate state and local fees. Taxes, rebates, fees and other credits are not reflected in the negotiated price.
Tag, title, registration, documentation fees – some fees reflect taxes levied by local authorities and cannot be avoided, although some fees, such as documentation fees, may be capped by local law. Other fees, such as the destination charge are mandatory as this reflects the cost to move the vehicle from the factory to the dealer. Be aware of which fees are mandatory and which are avoidable before agreeing to lease a car. An important distinction in leasing is that fees are paid up front and are not financed.
Lease acquisition fee – you will typically be assessed a fee by the dealer to acquire a lease on a car.
Down payment – by making a down payment, you reduce the principle owed on the car, decreasing the long term cost of the car that would accrue due to interest.
Trade in – the cost of leasing a car can be modified if you trade in your current car to the dealer. Determine if the dealer offer on the trade in value of your car is worthy before agreeing to include a trade-in as part of the leasing agreement.
Rebate – dealers may offer a rebate for certain options or as a promotion to induce you into buying or leasing a car.
Tax break – you will need to be familiar with the tax laws in your state. Some states do not tax motor vehicles at all. Other states will assess tax on monthly payments only rather than the sale price of the vehicle.
What is the money factor?
The money factor is the interest on the lease and it is not always disclosed by the dealer during a leasing arrangement. The money factor can be multiplied by 2,400 and this will give you a ballpark estimate of the interest rate collected by the dealer for leasing the car. For instance, a money factor of .000750 is equal to an annual percentage rate of 1.8%. The lower the money factor (also expressed as lease factor, lease rate or factor) the better the lease deal will be. One’s credit rating will have a large impact on the money factor available with the best rates available to those with a spotless credit rating.
Leasing versus buying
Those considering leasing a car will find the use of an online lease vs. buy calculator a useful tool in determining if they should lease a car. These are widely available and can be found through a reliable search engine. The typical lease calculator will factor terms MSRP, deduction, interest, and can sometimes provide you with a comparison of the cost to you in terms of leasing or buying.
This is the value of the car after the lease has expired and will help you determine if you intend to buy the car, trade in the vehicle or sell the lease before it is up. You should research how much the car will depreciate and what the residual value of the car will be at the end of the lease before agreeing to lease a car. Mileage will have an effect on the value of the car after the lease is up. If you know you will be using the car heavily, negotiating a higher limit on the annual mileage allotment will prevent you from being penalized later, as per the terms of the agreement. The higher the residual value of the car at the end of the lease arrangement, the lower the monthly payments you will have to pay on the car. The smaller the gap between initial cost and lease end value, the lower payments will have to be made on the lease.
Length of term for leasing a car
Unlike a loan, a longer lease is not necessarily as disadvantageous as a typical loan. It is advisable to pick a lease term as long as the warranty for the vehicle, which will protect you during the leasing period against faults and accidents. Therefore, you may have a long lease on a vehicle with a long warranty. Foreign models also tend to depreciate less, which means at the end of the lease, the car will be worth more than its domestic counterpart after a similar term. Lease terms are typically expressed in months, generally in increments of a year (36, 48, 60 months) but odd terms may be used to have you come in at another, less busy point of the year at the end of the lease. Short term leases are generally more expensive than longer term leases, owing to the fact that cars will depreciate rapidly during the first 24 months after they are sold. A car usually retains only 34% of its initial value after five years.