What to watch for in leasing a Car

Factual Questions
1

Hi gang,

Well, after some careful deliberation, my wife and I have decided to lease a new car (an Accent for those who are curious)

Leasing is the only option for us, since we have recently paid off a few large outstanding bills and freed up several hundred dollars per month in debt… This gives us enough for the vehicle and insurance. Buying isn’t an option, becasue the cost is still too high for that considering our other monthly bills…

So what are some of the things I should be watching for on a lease, and what can I say or do about them to keep the price lower? I’m going to spend the day on Carbuyingtips.com getting some pointers there, but for any of you that have dealt with this in the past, I would appreciate your input. This will be our very first car.

2

I have leased before. If you stay under the mileage, it is an OK deal. It seems to me that if you qualify for a lease, you would probably qualify to purchase… finance.
So, my advice is to explore both options. Don’t get into a lease b/c you think you have no other options.
My lease went off OK. But, I had a friend that, through no fault of her own, had her car totaled. Wow, the difference between what she owed and what her insurance paid was over three thousand. This left her driving a car that was significantly not comparable to the original car. So…maybe look into “gap insurance”. Read the fine print.
Good luck.

3

Unless you want to pay for the privilege of having a new car every two years, a lease is rarely as economically sensible as a purchase.

When you buy a car, you finance the difference between the purchase price and any downpayment (to include equity in your present car, if any). When the loan is paid, you own the car. Typically, a purchaser can make a deal that is significantly lower than the MSRP, the suggested retail price, of the car.

When you lease, you finance (borrow) the difference between the capitalized cost of the car, and the agreed-upon value of the same car in two or three years. At the end of the lease, assuming the car is in good condition and under the agreed mileage, you return the car, owning nothing.

One huge difference between the two is that in a lease, you’re essentially agreeing to “buy” the car at MSRP, and “sell” it at the real wholesale value in two years. If you want confirmation of this, ask the leasing agent: “At what percentage of of the MSRP was the capitalized cost figured?” If he even tells you (this is an area in which customers just aren’t supposed to delve), I would almost guarantee it’s 100% – or even higher! That is, they start the pricing of the car at more than the MSRP in some cases, and the write the lease to make you responsible for paying the difference between that high cost and the true wholesale value of the two-year-old car.

If your heart is set on that new car, and a good used car just won’t cut it… at least know what you’re “buying”. Try to negotiate the capitalized cost down. Negotiate the buyout down. Use the same method that you’d use to buy: check Edmund’s for the actual dealer cost of the car, and negotiate UP from it, not down from MSRP.

A lot of people don’t like to research, and feel it’s intimidating to bargain. Those people pay much more for cars than they need to.

  • Rick
4

find out what the deal is if the car suffers minor damage to the paint or body.

5

Man, there’s so much information on Carbuyingtips.com that I’m all headachy now…

In the States, it’s a felony to sell a car that doesn’t have the White sticker on the window with the MSRP on it. Is there a similar law for Canada? The car I test-drove last night had no such sticker (although it may have been in the glove box… Forgot to look in there.)

Has anyone ever arranged financing with a 3rd party agency, rather than at the dealership? How much did you save that way?

What’s this “Edmund’s” place you speak of?

Do you HAVE to pay MSRP when you lease?

6

If you are financially strapped, leasing is the worst thing to do.

Leasing is only for people with the “Hey I just went to the dealer, took a couple thousand dollars out of my pocket and burned it!” crowd.

Buy a used car. Don’t you have a relative that’s car smart and can check out cars for you? (I had two uncles, down to one now, that worked for car makers for years. Know their stuff inside and out. Can find amazing deals on cars and avoid the lemons.)

Repeat: Leasing is only for people who don’t care about losing thousands and are easily lulled into a false sense of convience. Most people who lease don’t do it again.

Do you get Clark Howard’s show in your area? Try listening to his take on leasing. Or visit his web site: http://clarkhoward.com/

7

If you are financially strapped, leasing is the worst thing to do.

Leasing is only for people with the “Hey I just went to the dealer, took a couple thousand dollars out of my pocket and burned it!” crowd.

Buy a used car. Don’t you have a relative that’s car smart and can check out cars for you? (I had two uncles, down to one now, that worked for car makers for years. Know their stuff inside and out. Can find amazing deals on cars and avoid the lemons.)

Repeat: Leasing is only for people who don’t care about losing thousands and are easily lulled into a false sense of convience. Most people who lease don’t do it again.

Do you get Clark Howard’s show in your area? Try listening to his take on leasing. Or visit his web site: http://clarkhoward.com/

8

Ok, this is all good information.
I’m looking now at the option of trying to finance through a third party before going to the dealer.

I still have so much to research… Man, why is this so complicated??

9

I’m sorry to be negative.

Since leasing means you’re giving the dealer less money up front than if you purchased, the deal will cost you more in the long run.

Unless you really need this car, why not save up (and pay off some debts first)?

10

All else equal, (it never is) leasing a new can be a better deal for the consumer than buying new, but you have to know what you’re doing.

As said before, if you can buy at a several thousand dollar discount but the lease is calculated at 100% or greater of MSRP, then, yeah, the buy is a better deal. You should be able to get the lease calculated at the same price as the buy. If not, walk.

If leasing, you have to make sure the lease payment includes “gap insurance.”

I’d stay away from 3rd party financing–less likely to be flexible with you at the end of the term.

Do not even think about leasing a car if you might average more than the included 12,000 miles/year.

If your cars have pretty much looked like they’ve been through Hell’s Ditch at the end of three years, leasing may not be a good idea.

It boils down to preferences: millions who lease are not all idiots. I would love to see a cite on the number who follow the rules and only lease once. It can’t nearly be nearly 100%

If you want a new car every three years that is always under warranty with a significantly lower payment than a 60 month buy, leasing may be for you.

Example: in late '99 model year, my wife leased a new '99 Saturn SC2 with MSRP of $20,000. Five year loan with no money down at 8% = monthly payment of $476. No way that’s going to happen. Instead, we got a three year lease with no money down for $325 per month. Critics scream “but you don’t own the car after three years!” And damn glad I am that I don’t.

The agreed residual on this car on 5/02 was $11,600. I knew they were smoking crack; there is no way this car at 4 model years old is going to be worth that much, but since I have no intention of buying the car and the inflated residual artificially lowers my payment, I’m all for it. At the end of the lease the car books at $7,500 and I’m laughing all the way to the bank. GM charged me only $9,400 in depreciation but true depreciation was $12,500.

Let’s look at the guy who buys the same car. He pays $476 X 36 = $17,136 for 36 months vs 325 X 36 = 11,700.

But wait, you say, the lease guy doesn’t own the car. Yes, but he can walk away after three years and owes nothing. The true owner can’t walk away after three years because he still owes $9,000 on the car and it’s only worth $7,500.

So the owner keeps the car to term and spends two years of exposure out of warranty buying tires ($400) a tune up ($250) an exhaust ($400) a battery ($100) and possibly worse. Meanwhile I’m in my second lease at $325/month. I’ve spent $325/month * 60 = $19,500 whereas the owner has spent $476 X 60 = $28,560 less the net value of the car after 60 months ($3,000) = $25,560 plus any non-warranty and maintenence items. In this example, I’m at least $6,000 ahead after five years.

Yes, everyone knows someone who got screwed on a lease. But as long as you know what you’re doing and the automakers are willing to provide hyperinflated residuals, I will take their money and drive a new car every three years.

If you are the guy who can buy a late model used car at wholesale and get new car financing on it with little or no money down while the thing never breaks, ever, and never needs any maintenance, and you keep it FOREVER, my hats off to you becuase your deal will be a little cheaper than mine.

11

Make sure you understand the type of insurance you will be required to buy. You might have to get the most expensive. Read the fine print and ask a lot of questions before signing.

12

Leasing is based upon what the car is worth at the end of the lease (residual value) A car with a strong resale (residual) will actually cost less to lease than a car with a poor resale value.
For example: A $15,000 Honda will have a much lower lease payment than a $15,000 Hyundai.
Why? Because the Honda will be worth twice as much as the Hyundai at the end of the lease. And that is what a lease payment is, the difference between what it is worth new, and what it is worth at the end of the lease- plus interest.
If you must lease, stick with Hondas and Toyotas, your payment will typically be less than with Korean cars like Hyundai, Kia, and Daewoo.

13

This good advice bears repeating. If you go over the stated mileage, you will pay extra, perhaps a lot extra. If your car gets damaged before you return it, you will pay to have it fixed. These charges can get big in a hurry, and can totally destroy any financial gains you intended to get from the lease.

Imagine having to pay a couple of thousand dollars just to give your car back! :smack:

14

As other posters noted, at the end of the lease, they come through with the “white glove” and try to make you pay dearly for every last ding and dent.

When I turned in my leased car, it had a few very minor scratches on each bumper (from when other cars bumped mine when pulling in and out of parking spaces). Well, the inspection guy said it was $750 worth of damage.

Also, as other posters pointed out, you will pay dearly if you go over your allotted mileage.

Further, a lot of leases contain an ‘end-of-lease’ fee. Watch out!!

Even in the short run, buying is not much more expensive than leasing. Find out the best price you can buy the car for, then figure out how much your payment would be if you borrowed that amount. It won’t be a lot higher than leasing.

15

One more data point, courtesy of my dad. He’s got a body repair shop and one time helped a guy clean up his leased (5yr) Mercedes prior to the return date. The car came up perfectly clean, no charges to speak of.

A few weeks later, the guy gets a bill from the dealership for $5,000! Turns out that his end of lease buyout figure was $22K, that is the amount, agreed to in advance, he could pay to buy the car at the end of the lease. The dealer resold the car for $17K and billed him the difference. Apparently, it was in the lease terms somewhere, because the guy (a lawyer) sent them a check for $2,500 to get them to go away, rather than fight it outright. This is by far the strangest lease story I’ve ever heard.

Check your terms very, very, closely!

16

I just returned my GMAC-leased Bonnevile, AND it was three months early. Here’s my experience:

Purchase: the lease experience was very easy, but I got it on a vendor program, so the capital cost was about $27,000 vs. the $33,000 sticker, so YES, you CAN negotiate the capital cost. “Vendor” programs are about as good as haggling, without the haggling, so really, I got a GREAT price for an AWESOME vehicle. The stated residual was $17,000. Hence the lease payments were based on $10,000 for three years, up to 45,000 miles (GMAC/Ford leases have 12,000 and 15,000 mile programs, and you can always purchases extra miles in advance cheaper than going over your limit later). Let me add I made no down payment.

There was no downside to leasing in this case, because I knew I wouldn’t buy the car at the end.

GMAC gives you something called a “wear square” to check out your “excess wear.” While I had some dings and scratches, all were within the allowances of the wear square, and hence there was no excess wear. NORMAL WEAR AND TEAR is accepted. (Note, Ford is even EASIER about wear-and-tear, but it WOULD be nice if they gave and actual wear-square type of guide).

Now, I mentioned that I turn in the car early. GMAC doesn’t penalize you, but you still owe the balance of the “rent charge” portion, which is really the interest that they would have earned. If the car goes wholesale for less than residual, they can charge you the entire balance up to the residual, no more. So assuming no excess mileage or wear, the MOST GMAC could charge me is the entire gross remaining payments I would have otherwise made. HOWEVER, if the car wholesales for MORE than the residual, GMAC will CREDIT me with the difference over the wholesale price, less the interest-portion of the payments I would have made. Because the car was in great shape and WAY under the mileage, I know that it will wholesale for more than the residual – I checked the going rates before I decided to unload it. I expect to walk out of it owing no more than $300. I left a $250 security deposit, so I’ll only need to give GMAC $50.

So, really, leasing is a GREAT way to go – you really only lose if you become attached to the car and want to buy it, or you drive a ridiculous amount of miles. Or if you think you’ll want to cancel the lease WAY before the end (in my case, it’s so close it doesn’t really matter).

Good luck!