What is a lease?
Simply put, a lease is similar to renting a car but
for a longer period of time. A lease contract allows
you to pay for only the portion of the vehicle’s
value that you use during the lease term. During the
lease term you agree to pay for insurance, licenses,
taxes, maintenance and repairs. The leasing company
retains ownership and title throughout the lease. At
lease-end, you simply return the vehicle or exercise
your option to purchase the vehicle for a pre-determined
price, otherwise known as the residual.
Leasing has grown in popularity over the years as an
affordable alternative to vehicle ownership due to the
fact that leasing typically offers lower monthly payments
and shorter time commitments than traditional financing.
Leasing often allows you to get into a vehicle that
might otherwise be out of your price range.
How is a lease calculated?
There are numerous factors that determine a good lease
deal from a bad one. Navigating the lease maze can be
quit confusing without the proper education or experience.
Our goal is to educate our clients and help you gain
the upper-hand as we negotiate your next lease deal
for you.
When you see a lease ad you’ll notice the ad
focuses on the lease payment and not on the price of
the vehicle. Don’t let the dealer take your eye
off the ball…a lease should focus on the vehicle’s
price as well.
Lease payments are calculated using the capitalized
cost, money factor, term and residual. The actual calculation
is complicated, and rather than going into the calculation,
our goal is to simply provide some basic education on
the subject of leasing.
• Capitalized cost – The financed amount
of the lease and is comprised of the vehicle selling
price, lease fees, sales tax or other added items.
• Money factor – Used to calculate the
interest on the lease. For a comparable interest rate
multiply this number by 2400.
• Lease term – The length in time of the
lease, typically between 24 – 36 months.
• Residual – The estimated value of the
vehicle at the end of the lease. This amount is set
by the leasing company and calculated as a percentage
of MSRP.
Money due at the beginning of a lease falls into three
categories; capitalized cost reduction, upfront fees
and taxes.
• Capitalized cost reduction – Think of
this as the down payment on a lease. The more money
you put down the lower your monthly payments will be.
• Upfront fees – The money required up-front
on a lease which typically includes the first payment,
security deposit, tags and title fees.
• Taxes – These vary by state, but typically
taxes are either collected upfront or collected on a
monthly basis. The tax is based off your state’s
tax rate times the monthly payment.
Advantages of leasing
Lower monthly payments – Leasing a new vehicle
typically offers lower monthly payments than traditional
financing.
Shorter term – Lease terms usually run for a
period of 24-48 months, allowing you to get into a new
vehicle more often.
Lower taxes – Always read the fine print, but
in most states you pay sales tax based on the monthly
payment times the lease term and not on the full price
of the car.
New car more often – Leasing offers the advantage
of getting into a new vehicle every two to three years
and without any trade-in headache at the end of the
lease.
GAP Protection – Many consumers do not realize
that if they finance their vehicle and it is significantly
damaged in an accident, they are typically responsible
for the difference or gap between their insurance check
and the loan payoff, which often can run several thousand
dollars. With a lease, GAP protection is usually included
and covers the difference should this situation arise.
Warranty protection – With the shorter term of
a lease, chances are you will be covered by the manufactures
warranty for the entire term of your lease.
Minimum or no down payment – It’s possible
to enter into a lease with very little or no cash out
of your pocket.
Is a lease right for me?
Leasing does not make sense for everyone. Ask yourself
the following questions to help yourself determine if
you’re a good candidate for leasing your next
vehicle.
Do I drive less than 15,000 miles per year? If you
answered yes, then leasing may be for you. Leases are
most economical for consumers that drive less than 15,000
miles per year.
Do I keep my vehicle in good condition? Leasing companies
require that you maintain the vehicles upkeep and maintenance.
If you don’t, you could be responsible for excessive
wear and tear charges at the end of your lease.
Can I stick with my lease until the end? Leases require
you to commit to driving your vehicle for a specific
number of months — typically 24 to 60 months.
If you feel your lifestyle, your finances, or simply
your taste in cars may change significantly in future
months, you may not be a good lease candidate. To end
a lease early is usually troublesome and costly. |
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Leasing
vocabulary
Below are some terms you are likely to encounter during
a lease. We’ve provided these for your education
and would be happy to help explain a lease to you in
greater detail…just give us a call!
Acquisition Fee: This is a fee that
most lessors charge to cover costs of setting up the
lease. It can include GAP Insurance, Residual Value
Insurance and Contingent Liability Insurance.
Capitalized Cost (Cap Cost): This
is the financed amount of the lease and is comprised
of the vehicle selling price, lease fees, sales tax
or other added items.
Cap Reduction: This is the same as
"cash down" on a finance agreement. It helps
lower the lease payment but it is not recommended.
Closed-end Lease: These are the most
popular leases being offered today. They limit the liability
of the consumer for the residual value at the end of
the lease and are also covered under Regulation M.
Depreciation: Is the decrease in the
value of the vehicle over a specific time period.
Excess Mileage Penalty: This is the
amount you will pay for each mile you drive over your
allotted amount specified on your lease agreement.
Gap Insurance: In the event the vehicle
is totaled or stolen, this insurance covers the difference
between the lease payoff and the amount the lessee’s
insurance pays.
Lessor: Is the party who is leasing
the car to you. Even though a dealership or broker may
arrange the lease, the lessor is often a bank or the
financial arm of a car manufacturer.
Money Factor: This is used to calculate
the interest on the lease. For a comparable interest
rate multiply this number by 2400.
Monthly Depreciation: This is the
amount the vehicle loses value each month and is part
of the base monthly payment.
Monthly Interest: This is the monthly
finance charge and is part of the base monthly payment.
Purchase Option: This is the amount
the vehicle can be purchased for at the end of the lease.
Residual Value: Is the estimated value
the vehicle will be worth at the end of the lease.
Term: Is the length of the lease. |
