re: Updated v.3.16 - Will Cover's 2018 buying guide to purchasing a new vehicle

Why Car Leasing is Generally a Bad Idea

Leasing provides a good deal for four parties - the sales person, the F & I guy, the dealership’s owner and the finance company (leasing company). It is a lousy deal for the customer. You owe something, but you own nothing. Leasing adds a layer of complexity to the deal that allows the salesman to hide or misrepresent the true purchase price.

The less you understand about the following terminology, the more susceptible you are to accepting a bad deal:

• Capitalized Cost – This is the vehicle’s selling price and can be negotiated. This is the total amount you’re financing, including the negotiated price of the vehicle, all options, fees and taxes. It should be under the Manufacturer’s Suggested Retail Price (MSRP).

• Capitalized Cost Reduction – Your down payment. This can be negotiated.

• Acquisition Fee (Bank Fee) – An administrative fee. This is usually lumped into the Capitalized Cost a.k.a. “due at signing” figure. In this respect, it is a “hidden fee.” Acquisition fees vary among leasing companies. Typically, dealers do not make a profit on this fee, although some leasing companies may “kick back” part of the fee to the dealer as a reward for sending them business. Acquisition fees range from $395.00 to $1095.00, with an average of about $595.00. And contrary to what the finance company (a.k.a. leasing company) wants you to believe, this is a fee that can be negotiated.

• Disposition Fee – This is a fee that can be imposed (Did you read the contract?) should you decide not to buy the leased vehicle at the end of the lease term. This is a fee that can be negotiated.

• Money Factor – This is your interest rate. In order to get the Money Factor, you have to multiply it by 2,400. The Money Factor is set by the finance company (a.k.a. leasing company) and can be different depending on which finance company (a.k.a. leasing company) you decide to use. The Federal Trade Commission has determined that this is not a debt, so there is no federal disclosure involved. Therefore, you have no truth in lending disclosure sheet.

• Residual Value – This is the value of the vehicle at the end of the lease. Residual values can be different depending on which finance company (leasing company) you decide to use, but Automotive Lease Guide Residual Percentage Guide is the industry’s bible.

Most people are quick to answer a sales person when he/she asks if they’re planning to buy or lease a vehicle. As soon as you give away that you’re planning to lease, the price of the vehicle (capitalized cost) will freeze up. You’ve essentially lost any leverage you had at this dealership. You should negotiate the price of the new vehicle as if you’re going to pay for it with cash out of your own pocket and then bring that over to the lease.

Leasing has become an incredibly effective tool for dealers to sell their product at a significantly higher price and profit margin and is often “pushed” or “encouraged” through the sales process.

• Leasing makes the car more affordable and therefore easier to sell. The buyer gets focused on being able to drive a nicer vehicle for a lower monthly note than what they most likely could not afford to buy.

• It allows the customer to afford a more expensive car, and the more expensive the car, the larger the profit.

• Leasing allows the dealer to legally hide the true cost/price of the vehicle and charge you a higher price than you would normally agree to.

• A leasing customer is more likely to return to the same dealership to get their next vehicle and next vehicle and next vehicle. Even though your original sales person will be long gone, the dealership is able to maintain customer retention and that’s where it pays off in the long run.

An inflated residual value lowers your monthly payments, but it can also handcuff you. A more realistic residual value will make it easier to sell the lease, trade your vehicle in the middle of the lease or buy the vehicle at the end of the lease. Many people get lured in by the low initial payment, but should beware that all the financial factors that go into leasing, including trading in your current vehicle to obtain a new leased vehicle will effectively ensure your monthly payment will be much higher in subsequent leases. This makes it hard to break the cycle and purchase future vehicles with a sizable down payment.

Be careful of charges for excessive wear and tear. A leasing contract requires you to return the vehicle in good shape. But your definition of good shape may not match your leasing company’s definition. Prior to turning your vehicle back in, ask the leasing company to inspect it for wear and tear. If there are any dings, dents or chips, get them fixed ahead of time rather than have the dealer charge you for them later. It’s usually cheaper to get the repairs done on your own watch; otherwise, the dealer could charge you for full body shop work.

A person that decides to lease a vehicle needs to know how many miles they are going to drive in a year. Leases typically allow for 10,000, 12,000 or 15,000 miles per year. With a common lease period being 36 months, that mean you have to stay under 30,000, 36,000 or 45,000 miles for the life of the lease. The lower the mileage limits, the lower the depreciation of the lease and lower the monthly payment.

If you surpass the mileage limit, you’ll have to pay at least 25 cents per additional mile. But if you know you are going to surpass the mileage limit, you can negotiate buying extra miles for a lower rate than 25 cents per additional mile. While you’ll end up with a larger monthly lease payment, it will be comparatively cheaper than paying for hundreds of additional miles at the end.

Simply put, leasing is the equivalent of throwing a $100.00 bill out of your vehicle’s window every week for 3 years in terms of depreciation. The bottom line is this … any way you look at it, leasing is a convenience that you’ll pay for in the end. Put another way, if you can’t afford to buy your next vehicle with a four-year loan or less, then you really can’t afford it. The better deal long-term is to buy a reliable vehicle (good, late model used vehicle or lower priced new vehicle) and hold onto it as re-leasing every three to five years is no way to build wealth.