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Leasing A Car

If you have considered buying a new car, you've probably wondered, "Is leasing a good thing or a bad thing?" The answer is, yes, leasing can be a good option if you are in the right situation.

Leasing is a great way to get the car you desire at a low monthly payment. Of course, buying a car with cash or financing and keeping it for a very long time is still the most efficient way to go, but if you usually buy a new car every 2-4 years, always have a car payment and don’t drive too many miles, leasing may save you a lot of money. Leasing is appropriate in other situations as well.

For instance, let's say you've just graduated from college and will be starting an entry-level position. You are fairly certain your income will be going up in 2 or 3 years, but you need reliable transportation right away. Consider a lease. It could give you the flexibility of low payments without paying a lot of interest by financing a car on a 5-7 year loan.

Leases can also be a good idea for a young family looking for a new mini-van but with a tight budget. A lease may be the only affordable way to drive off the lot in a vehicle that has the features they really need.

A Leasing Myth

"Shopping for price is the right way to go." This is the biggest myth in regards to shopping for a lease. Since you are not buying the car, the price will not be the only factor in determining your monthly payments. Consumer magazines that recommend you shop price when leasing are only setting the consumer up for the dealer.

Here's another big leasing 'no-no.' Let's say you have spent an hour haggling over a price with the dealer for a min-van you had planned to buy with financing. You have come to a good price and being an educated consumer, you ask if the dealer could lease you the vehicle for the same price. LOOK OUT! Dealers love when this happens and here's why:

Leases are made up of three key components: capitalized cost (the price of the car), residual value (the buy-out cost at the end of the lease), and the Lease Money Factor, or LMF, which is similar to an interest rate. Dealers earn big profits on a higher LMF.

Look at the table below to see how the same lease arrangements with varying LMF's can affect a dealer's profit.

Vehicle Capitalized Cost $19,000 $19,000 $19,000
Residual Value $12,040 $12,040 $12,040
Lease Money Factor .00350 .00450 .00550
Monthly Payment $301.97 $333.01 $364.65
Additional Dealer Profit    $1117.44 $2234.88

The only difference in each lease is the LMF. The dealer is earning a great deal of money when the LMF is higher. If you are negotiatinig price, the dealer can use a higher LMF to pad his bottomline. When you look at your lease agreement the Capitalized Cost (the price you fought so hard for) might be exactly what you negotiated, but if the LMF has been rasied, the dealer just tacked on thousands in additional profits in the Lease Finance Reserve, and you are shelling out more money each month.

Avoid spending more on a lease by comparing these 3 items only.

  • UP FRONT COSTS: Down payment, security deposit, first payment and acquisition fee.
  • MONTHLY PAYMENT: Consider what is included in the payment (sales tax, registration fees, etc.)
  • ADDITIONAL FEES AT THE END OF THE LEASE: Termination fees, excess miles and wear and tear can all add to your total cost for the vehicle.

Watch out for these tricks when shopping for a lease. Click here to compare lease offers.

GAP INSURANCE: GAP insurance protects you in case something happens to your vehicle that requires the lease to be paid in full. The value of the vehicle may not exceed the amount you still owe on the lease. For example, your car is stolen and not recovered. In this case your insurance company may place a value of $15,000 on the car based on current used car prices, but the payoff on your lease is $18,000. You would be responsible for the $3000 difference. Most drivers are in this negative equity position, and dealers will try and take advantage of them. They will eagerly sell you GAP coverage for $500-but don't fall for it. Like so many things, the idea of GAP insurance is a good one, but you are paying the dealer simply to print out a form. There are alternatives. Many lease companies include GAP insurance in their lease apgreements at no additional cost, and insurance companies now offer GAP coverage or Auto Loan/Lease Pay-off coverage for a small fee (around $40 a year) along with your regular auto policy. It is always a good idea to check rates for auto insurance every three years

EXCESS MILES: All leases come with mileage limitations that can leave you paying additional fees at the end of the lease. With excess mileage fees, you have to pay a penalty (usually between 10 and 25 cents per mile), for every mile you go over the limit. Dealers have learned to turn this to their advantage. One clever trick they teach their salespeople is to put a customer into a low mileage lease of around 12,000 miles a year, when they know the customer is likely to drive 15,000 or 18,000 per year. The lease might sound appealing, because it comes with a lower monthly payment, but you could surpass any savings by paying more at the end of the lease. They will say something along the lines of, "Don't worry about the mileage, we'll take care of it when you come back and lease your next car." What they really mean is the extra money will be added to the capitalized cost of your next vehicle. If you are 12,000 miles over the mileage allowance at the end of the lease, and the charge is 15 cents per mile, they will tack on an additional $1800 to the capitalized cost of your next lease, increasing your payment by $50 a month on a three-year lease. Your best bet is to truthfully consider how many miles you are apt to drive and plan to negotiate your lease terms accordingly. Companies will let you buy miles in advance at a discounted rate, which might come in handy if you can't find a lease with the mileage you need.

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