Debt Free

If you like the whole concept of no money down, or you want to tool around in absolutely the nicest set of wheels you can afford, you may have talked yourself into leasing a new car. That may be a great idea, or you may have just talked yourself out of a pile of money. How are you supposed to know if you should lease or buy? There are actually many lease vs. buy calculators available to help make that determination from a purely financial standpoint, but when was the last time you made a decision that way? 

There are some legitimate reasons for leasing your next vehicle. For instance there are tax advantages associated with leasing if you own a business. Some people just prefer to drive a new car every 2 – 3 years, depreciation be damned. Cars and trucks are making major advances in safety, economy, drivability (impressive, considering what porkers many vehicles have become), and content (a major cause of the added pork) in that time period, so there may be something to be said for that train of thought. There are also some folks who like the idea of keeping the monthly cash out of pocket low, even if that means a lease and it doesn’t happen to be the best financial course of action.

On the other hand, cars today last longer than ever. Remember 25 years ago, when a car with 100,000 miles on it was all used up? That’s definitely not the situation anymore. These days vehicles with that many miles are just reaching middle age. They drive great, have no squeaks or rattles, the interiors and exteriors look almost new, and there’s not a hint of smoke from the tailpipe. Unless your requirements have changed, why would you need to replace them with something newer?

If you are determined to lease, you should at least know what the F&I guy at your local car dealership is talking about when he starts into his pitch. There are some terms associated with leasing that would behoove you to know. Here are some lease terms:

Money Factor –
Not the interest rate of the lease. To get the approximate APR, multiply the money factor by 24.

Residual Value –
The value of the car at the termination of the lease. This is an estimate only. When you lease you are effectively financing the difference between the Purchase price and the residual, so this will have a major effect on your lease payment. They are always calculated as a percentage of the vehicle’s MSRP. It doesn’t matter how great of a negotiator you are. Even if you get the salesperson down to a dollar, you’ll have to congratulate yourself later, as the residual value of your leased vehicle will still be determined using the MSRP. That percentage however, can be set at virtually whatever the leasing company would like.

The higher the residual value is set, the lower your lease payment will be. Cars that have traditionally good resale values have higher residuals. These are often better choices to lease than those vehicles that lose a higher percentage of their value and thus have a larger difference between MSRP and the residual.

Closed End Lease –
This type of lease allows you to walk away from the vehicle at the end by dropping off the keys and paying any associated fees, such as excess mileage charges. If you have a closed end lease, you can purchase the vehicle for the residual amount at the termination of the lease, so there is a bit of incentive on your part to choose a vehicle where, in your area, they tend to have a high resale value. If you are able to end up with a vehicle that’s worth more at the end of the lease than the residual value, you can get a great deal, as you can buy it for the residual value, even though it’s worth more than that. If it’s worth less, it’s no skin off your nose, you just walk away from the vehicle.

Cap Cost – This is the amount the leasing company purchases the car for from the dealership. Here you can negotiate for a lower price on the car, and it will make a difference.

Cap Cost Reduction –
What it sounds like, except that you have to pay for the privilege. You are basically helping the leasing company buy the car by kicking in some cash of your own at the inception of the lease. So much for “No money down.” This amount can be thousands of dollars.

Vehicle Leasing Fees to Avoid –
There are some fees associated with vehicle leasing that you should fight tooth and nail to avoid paying, although you may get stuck with some of them anyway. Two of these are the acquisition fee or origination fee, and the disposition fee. The first is basically a fee paid by the car lessee for taking out the lease. That’s crazy, and pure profit for the leasing company, as if they’re not making enough off of you. Refuse to pay it. They may insist on it, but hold your ground or get the dealer to absorb it. You don’t need the car that bad, in most cases.

The disposition fee is another fee you should refuse to pay, but since you’ll not have to pay it until the end of closed end lease if you don’t buy the car, you may be completely unaware of it. That’s why you should actually read all that fine print mumbo jumbo in the lease contract. It’s almost always in there. Make them take it out, unless you’re pretty damned sure you’ll be buying the vehicle at the termination of the lease.

One leasing fee you’ll probably have to agree to is the early termination fee. Unlike the prepayment penalty on your mortgage, you most likely can’t get out of agreeing to this one before you sign the lease. Early termination fees are huge, so be aware of them. If you have to end the lease before the term is up, but near the end, it may actually be cheaper to keep the thing in your driveway, rather than turn it in and take the bath.