Sticker prices are going up. Many families want a better, safer car, with air bags, anti-lock brakes and other features that add thousands to the final cost.
That’s why leasing has become so popular. In many cases, new-car shoppers drive away with lower monthly payments by leasing rather than buying.
But though nearly one of every four new cars is leased rather than purchased, most of us know less about how to lease a new car than how to buy one.
We aren’t sure what questions to ask, or what the answers mean. And that makes it difficult to know whether leasing make sense and whether it’s a better deal than a purchase.
Here are some answers that may help:
Q-What is leasing?
A-Think of leasing as buying 40 percent or half of a car, the part that loses its value over the term of a two- or three-year lease. Because you’re paying only for the part of the car’s value that you use, the monthly payment is lower than on a standard auto loan. And there’s often no down payment. So you can lease a nicer car than you could afford to buy. Just be sure to read the fine print.
Q-How does leasing work?
A-There are three parties involved-you, the car dealer and the finance company, either an independent leasing company or a finance subsidiary of the automaker. You negotiate the lease contract with the dealer, who then sells the car to the finance company. The finance company is the lessor to whom you make monthly payments.
Q-Should I consider leasing?
A-Yes, if you’re likes to trade in your car every three or four years, in which case you may save money by leasing. Leasing versus buying also can be a financial wash, in which case the lease still may be more attractive. With two back-to-back two-year leases, for example, you get two new cars and are covered by a factory warranty for all four years. With a four-year loan, you get one new car and may have repair bills in the third and fourth years. Leasing also can be more expensive than buying, in which case you still may want to consider it if:
– You can’t afford to make the down payment and higher monthly payment on a standard car loan.
– You don’t mind making monthly payments indefinitely.
– You drive less than 15,000 miles a year.
– You want to drive a more expensive car than you can buy.
– It’s important to you to drive a new or almost-new car.
– You’d rather invest the money you’d use for a down payment on a loan and let it appreciate.
No, if you prefer to pay off a loan and drive your car into the ground, with no monthly payments for several years, or you don’t mind mind driving an older car, or you don’t mind paying for major repairs, or you drive significantly more than 15,000 miles a year.
Q-Can I negotiate a lease?
A-You can and should-just as if you were buying a car. Two experts even suggest you negotiate the lowest purchase price you can, and then say, “I want a lease based on that purchase price.” But first you’ll have to talk the same language. So here are a few important terms:
– Money factor: A number used in calculating monthly lease payments. It reflects the interest rate paid on the part of the car’s value you’re buying (to use our original analogy).
The money factor can be approximated by dividing the interest rate by 2,400. For example, an 11 percent interest rate would result in a money factor of .00458. (See below for an explanation of how it’s used in calculating monthly payments.)
– Capitalized cost: The price the finance company pays the dealer for the car.
– Residual value: The estimated wholesale worth of the car at the end of the lease period, usually stated as a percentage of the sticker price. This is what the finance company expects to be able to sell the car for wholesale at the end of the lease. The residual value also is the amount you can buy the car for at the end of the lease, though the finance company may accept less. If you exercise your purchase option and the blue book price is less than the residual value, you want to pay less.
Think about it: The more the finance company pays the dealer for the car (the higher the capitalized cost) and the less the finance company can sell it for at the end of the lease (the lower the residual value), the more you’ll have to pay each month to lease the car. So what you want is a lease with a low cap cost and a high residual value.
So what’s high and low? One thing you can do is check the Automotive Lease Guide, a $9 bimonthly California publication that lists what new cars will be worth in the future. Its estimates generally are more conservative than the residual values set by leasing companies. So ideally, you want a residual value that’s higher than what’s in the guide. (To order the guide, call 805-965-1403.)
Also, ask the dealer for the cap cost. Consumer advocate and auto leasing expert Charles Hart says that’s the least likely piece of information a salesperson will volunteer. But Hart says you wouldn’t buy a car without knowing the purchase price and you shouldn’t lease one without knowing the cap cost. So insist on being told. Ask yourself, “Would I buy this car for the cap cost?” If your answer is “no,” Hart says negotiate a lower price just like you were buying the car.
Q-What’s negotiable?
A-After you’ve found a lease with a high residual value and low money factor, ask the dealer for the cap cost and invoice price, the amount the dealer paid the manufacturer for the car. If the dealer won’t give you the invoice price, you can get it from PACE 1993 New Car Prices or other, similar guides. If the invoice price the dealer gives you doesn’t jibe with the book, ask why.
The difference between the invoice price and the cap price represents the dealer’s profit margin before business expenses. PACE says if you can buy a car for $100 to $300 over cost, you have a good deal, and so does the dealer. Hart says that’s a good rule of thumb for leases, too.
But one General Motors dealer, who asked not to be named, said he “likes to make $900 to $1,000” per car. The deal you wind up with will depend on demand for the car, how hard you’re willing to negotiate and how much you want the car.
The residual value and money factor are difficult, but not impossible, to negotiate because they’re set by the finance company and technically beyond the dealer’s control.
Q-Then what?
A-The dealer will calculate a monthly lease payment to reflect the profit margin you agreed on. Here’s how to estimate what the payment will be:
– Calculate the value of the car you’re using each month by subtracting its residual value from its cap cost and dividing by the number of months in the lease.
– Calculate the monthly interest cost by adding the cap cost to the residual value and then multiplying that sum by the money factor.
– Add the used value and interest costs.
– Add state sales tax.
Some lease ads, especially for more expensive cars, boast low monthly payments in bold print. Look closely at the fine print, and you may see a substantial cash down payment is required. Without it, your monthly payment will be higher, perhaps much higher.
If you drive more than 15,000 miles a year, say so. You should be able to negotiate paying about 8 cents for every mile over the standard 15,000-mile limit, but limits, too, are negotiable. If you don’t get that spelled out in the contract, you’ll end up paying about 12 cents per extra mile.
While three-year leases are still standard, many dealers are pushing two-year leases. “Drive new every two,” is one motto.
Ask what the difference is between a two- and three-year lease payment. They might be very close or even identical, in which case you might want to go with the two-year lease-you’ll get a new car sooner. But if you lease another car at the end of two years, the payments might be higher. Generally, the longer the lease, the smaller the monthly payment.
Ask what happens if the car is stolen, totaled or turns out to be a lemon. Make sure you’re protected from getting stuck with a chronically ill car, and get it in writing. If a car is stolen or totaled, the settlement from your insurance company can be a lot lower than what you owe on the lease. Make sure gap insurance is included to cover the difference.
Make sure the lease is “closed ended” or you’ll end up paying any difference between the residual value and what the car is worth at the end of the lease.
