Category: auto leasing

Buy a car at the end of your lease

Youve come to the end of your lease and you like you car enough you want
to keep it in the driveway. Just like buying a used car, there is some
research to be done to nail a good deal.

First, you need to know the cost of buying out your lease. Read the fine
print of your contract and look for the purchase option price. This
price is set by the leasing company and usually comprises the residual
value of the car at the end of the lease plus a purchase-option fee
ranging from $300 to $500. When you signed on the dotted line, your
monthly payments were calculated as the difference between the vehicles
sticker price and its estimated value at the end of the lease, plus a
monthly financing fee. This estimated price of the car value at the end
of the lease is what is termed in leasing jargon residual value. It is
the expected depreciation or loss in value of the vehicle over the
scheduled-lease period. For example, a car with a sticker price of
$40,000 and a 50% residual percentage will have an estimated $20,000
value at lease end.

Now that you know the cost of buying out your lease, you need to determine
the actual value, also termed market value, of your vehicle. So, how
much does your car retail for in the market? To pin down a good, solid
estimate you need to do some pricing research. Check the price of the
vehicle, with similar mileage and condition, with different dealers. Use
online pricing websites, such as Cars.com, Edmunds.com and Kelly Blue Book
for detailed pricing information. Gleaning pricing information from various
sources should give you a fair estimate of your vehicles retail value.

All you have to do now is compare the two amounts. If the residual value is
lower than the actual retail value, than youre into a winner.
Unfortunately, there is a good chance a car coming off a lease is a little
on the high side.
Dont despair though. Leasing companies know as much that residual values
on their vehicles are greater than their market value and as such are
always on the look out for offers. You can knock down on the price of your
leased vehicle with some smooth negotiating tactics. Put forward a price
that is below your actual target and negotiate hard until you wind up near
that figure.

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The residual value of leasing

If you are in the market to lease a vehicle, you will hear the term
residual value recur like a leitmotif. A residual value does not only
affect your monthly payments, but is equally used by leasing companies
to determine any penalties should you break your lease early and how
much to pay if you decided to buy the vehicle at the end of your lease.

Let us first start by looking at the meaning of residual value. The
term residual value, refers to the value of something after it has
been used for some time. In leasing lingo, it refers to the
depreciation of the vehicles value over the life of its lease.
So how does it exactly affect your monthly payments? When you lease a
car, you pay for the cars value that you use over the lease length.
Suppose you leased an $18,000 car for 2 years: the leasing company
needs to estimate the value of this car in two years time in order to know
how much of the car you will be using during your lease term. Thats where
the residual value comes into the equation. If the residual value is
estimated to be $13,000 at the end of your lease, then your monthly
payments will be calculated on the $5,000 you will use over 24 months,
giving an average monthly payment of $208.3 (plus interest, tax and fees).
How about if the car is expected to lose half its value over the same
period? In this scenario, you will be using $9,000 over the same period,
leaving you with a higher monthly payment of $375 (plus interest, tax and
fees).
As you can see, residual values are a key factor in determining how much
money to pay on your lease and the higher the residual value, the lower
your monthly fees. This works in reverse if you build a bond with your car
and decide to purchase it at the end of your lease. If we stick with the
same example above, the lower monthly payments in the second scenario come
at the cost of paying substantially more to buy your car at the end of the
lease.

So, since the residual value is so important, how do I know which one is
best for me? Well, it all depends whether you want to purchase the car at
the end of your lease. If you dont want to make a large down payment and
you want low monthly payments, then a car that holds with a higher residual
value is a good deal. If you are thinking of purchasing the car at
lease-end, then you need to balance low-monthly payments with a moderate
residual value.

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Using lease calculators

Want to calculate your monthly lease payment? Consider using a lease
calculator

If you are considering a car lease, then you might want to know some key
figures involved in the deal: the monthly lease payments, the overall cost
of the lease and how much savings can be made compared to purchasing the
vehicle.

A lease calculator relieves you from the stress of having to know the
complex underlying lease formulae used in calculations. You simply plug a
number of figures into the calculator and hey presto! You get a detailed
rundown of detailed payments, taxes and total lease costs.

Figures you need to get from your dealer about a specific lease youre
interested in include: capitalized cost, estimated residual value at the
end of the lease, the number of months in your lease and the money factor.
Make assumptions and change some of the figures to see how it affects your
lease payments. For instance, residual value is an estimated value of what
the vehicle will be worth at the end of the lease. You can input different
estimates to cover different scenarios and assumptions.

As a final note of caution, bear in mind that lease calculators only do
calculations and check the accuracy of abstract mathematical formulae. They
do not tell you whether a lease is good or bad.

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Buy or Lease?

Its the classic dilemma that faces every auto-consumer out there: Pay
cash upfront or forego the ownership and pay monthly settlements instead?
Buy or lease for a new set of wheels?

As is the case with every other common dilemma, there is no slam-dunk
answer. Each option has its own benefits and drawbacks, and it all depends
on a set of financial and personal considerations.

First, your finances. Affordability is clearly key, and you need to ask the
question of how stable is your job and how healthy is your general
financial situation. The short-term monthly-cost of leasing is
significantly lower than the monthly payments when buying: you only pay for
the portion of the vehicles cost that you use up during the time you
drive it.
If you have a lot of cash upfront, then you can opt to pay the down
payment, sales taxes – in cash or rolled into a loan – and the interest
rate determined by your loan company. Buying effectively gives you
ownership of the car and that feeling of free driving that goes on
providing transportation.
If, say, you want to get into luxury models but cant afford the upfront
cash of purchasing the vehicle than youre a good candidate for leasing.
Unlike buying, it gives you the option of not having to fork out the down
payment upfront, leaving you to pay a lower money factor that is generally
similar to the interest rate on a financing loan. However, these benefits
have a price: terminating a lease early or defaulting on your monthly lease
payments will result in stiff financial penalties and can ruin your credit.
You need to make sure you carve out the monthly lease payment in your
budget for the foreseeable future, at least for the duration of the lease.

Besides the financial aspect, making a buy or lease decision depends on
your own particular lifestyle choices and preferences. Think about what the
car means to you: are you the sort of person to bond with the car or would
you rather have the excitement of something new? If you want to drive a
car for more than fives years, negotiate carefully and buy the car you
like. If, on the other hand, you dont like the idea of ownership and
prefer to drive a new car every two to three years then you should lease.
Next, factor your transportation needs: How many miles do you drive a year?
How properly do you maintain your cars? If you answer is: I drive 40,000
miles a year and I dont really care much about my cars as I dont mind
dealing with repair bills, then youre probably better off buying. Leasing
is based on the assumption of limited-mileage, usually no more than 12,000
to 15,000 miles a year, and wear-and-tear considerations. Unless you can
keep within the prescribed mileage limits and keep the car in a good
condition at the end of your lease, you might incur hefty end-of-lease
costs.

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How to spot a good car lease

Leasing has been lauded as your cheapest ticket to keep up with the
industrys hottest vehicles and trends. The jury, however, is still out
on leasing: with the industry long on hype and short on detail, it is
difficult to distinguish between a genuinely good deal and a downright
up-selling exercise.

So how do you spot a good deal?

First, you need to find out if there are any down payments on the lease. A
down payment refers to the lump sum amount that you pay upfront, either in
cash, non-cash credit or trading allowance, to reduce your monthly payment.
You should think twice before putting money down on a lease: not only are
you getting a rough deal, as youre essentially forfeiting the general rule
of leasing: not putting any cash upfront, but the money is not recoupable
at the end of your lease. There is another big disadvantage: in the event
of your car getting damaged or stolen, you insurance and the gap cost will
not cover the loss.

Mileage Limit

Most leasing companies allow you a limit of 45,000 free miles over the
length of a 3-year lease. This may seem like a good deal at first sight,
but when you consider it only comes to 15,000 miles over a 12 month period
its not difficult to foresee why it might be difficult to stay within this
limit. Even people working from home have little trouble putting 15,000
miles on their cars.
If you exceed the mileage limit, the penalty for each excess mile can be as
high as 20 cents. This can add up quickly over the length of your lease: an
additional 4,000 miles a year over the length of a 3-years lease contract,
will end up costing you an extra $2,400 in excess mileage charges!
Be realistic about your mileage needs, especially if you have to regularly
commute over long-distances, before you sign the contract. Consider padding
the miles that you expect to use since it is less expensive to contract for
the extra before you sign than it is to pay the extra charges at end of
your lease.

Sales Tax

Sales tax is usually capitalized and added to the monthly payments.
However, some dealers choose not to include it in their calculations to
drive the advertised lease payments even lower. What they do instead is
state in the small print that the monthly payment excludes sales tax.
Make sure you carefully read the fine print for any extra, hidden costs not
included in the advertised monthly payment. Unscrupulous fees that
typically slip through the cracks include sales tax, registration and title
fees.

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Fees involved in leasing

Mention auto-leasing and most people will automatically assume a low-
monthly payment. There is actually more than what meets the eye, and a
number of fees are involved at various stages of the lease process.

At the beginning of the lease, you have to pay a refundable security
deposit, typically equivalent to one monthly payment, to safeguard against
non-payment and any incidental damage done to the car at the end of the
lease. You are also required to pay an administrative charge, called
acquisition fee. Other fees include licenses, registration, title and any
state or local taxes.

During your lease, and you expected to honour your monthly payment
obligations. Any failure to do so will result in late-payment charges.
You have to pay any traffic tickets, emission and safety inspections and
ongoing maintenance costs. Ending your lease early will result in
substantial early termination charges.

At the end of the lease, expect to pay any excess mileage costs, charged
at 10 to 20 p a mile. Any incidental damage done to the car, and deemed to
be above normal, will result in excess tear-and-wear charges. Finally, if
you choose not to purchase the vehicle, then you have to pay a disposition
fee.

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Lease Financing

For auto-consumers, crunching the numbers is one of the most difficult and
confusing aspects of leasing.
Take the finance charge on a lease for instance. Most people just dont
understand how this is calculated on capitalised cost AND residual value
instead of just the capitalised cost. For most, it seems plainly obvious,
just as is the case when purchasing, that a charge should be levied on the
capitalised cost of the vehicle.

Well, no quite! When you lease a car, youre only using the car over a
specified period of time with the option of buying the car. The residual
value represents the loan balance at the end of the lease. If you add it
to the capitalized cost and divide by two, youll get the average
capitalized cost outstanding over the lease term. Let us suppose youre
leasing a car with a capitalized cost of $25,000 and a residual value of
$15,000. You average balance over the lease term, irrespective of how long
it is, is $20,000 the sum of the two divided by two -.
Using this sum works because the money factor is the annual interest rate
devided by 24, rather than 12. Continuing with our example and assuming an
interest rate of 6% APR:
$30,000 X (6 per cent / 24) = $75
(Capitalized cost + residual value) X (interest rate / 24) = Monthly
finance charge
This finance charge is added to the depreciation charge to calculate the
monthly payments on your lease.

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Benefits of leasing

Despite aggressive low-interest financing, cash-back offers and other
purchasing incentives offered by leading auto-makers to buyers, leasing
numbers keep increasing steadily over the years. Leasing is not only an
attractive financial proposition to most auto-consumers, but also a
lifestyle and preference choice.

Benefit Number 1: Keeping up with the latest trends

Leasing is sometimes more of a personal and lifestyle choice than a
financial one. Many people are not comfortable with the idea of owning a
vehicle over a long period of time. Theyd rather keep up with the latest
trends of the industry and drive the latest models every two to three
years.

Leasing a car gives you the convenience of having the latest technology
and safety innovation, such as an electronic stability system, DVD
entertainment systems and advanced stereo equipment. If you are willing to
forego ownership for the latest set of wheels, than leasing is your best
option.

Benefit Number 2: Purchasing Flexibility

Leasing also offers purchasing flexibility: it allows you to defer the
purchasing decision while using the car. You dont have to haggle with your
mechanic over repair expenses, deal with hefty maintenance bills or worry
about a depreciating asset. Provided you can keep the vehicle in good
condition and stay within the contracted mileage allowance, youre
effectively getting a test drive for the length of your lease.
At the end of your lease, you can purchase the vehicle or simply turn in
the keys and walk away. No questions asked.

Benefit Number 3: Cash Flow

Leasing offers many short-term benefits. It reduces your initial cash
outlay as you do not have to pay the large down payment required for car
ownership. You only pay for the depreciation on the car – only the part you
will use during your lease, not the entire vehicle. This results in lower
monthly payments and frees even more cash. This cash can be put to use more
intelligently elsewhere than the questionable investment of owning a
depreciating asset. If you are self-employed or use your car for your job,
then you can write off your leasing payment as a business expense.

Benefit Number 4: Negotiating Leverage

Although it may seem a little unorthodox in this industry, almost
everything about leasing is negotiable. If you know all the fees involved,
you can lower your monthly payments, negotiate the purchase price of the
vehicle at the end of the lease and contract additional miles on top of
your mileage limit. You can also do some shopping around and compare deals
from different auto-insurers to get the cheapest GAP insurance for your
lease.

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Auto Insurance and Leasing

When leasing a car, its easier to stick with the same company for your
auto insurance. What you dont know, however, is that you may end up
paying too much for your coverage and its better to look elsewhere for
lower rates.

When you lease, the vehicle that you will drive belongs to the leasing
company. They want to make sure that their investment is covered in the
event the vehicle gets damaged, totalled or stolen. They typically want
to get covered for the difference between what your auto-insurer pays and
your outstanding leasing obligations at the time of the accident or
damage. This is called GAP, short for Guaranteed Auto Protection, and is
usually included in the leasing contract.
If your leasing company is called BMW Financial Services, Chrysler
Financial or any other finance division of an automaker, then chances are
your GAP insurance will be offered by the same lease company.

You are under no obligation to accept GAP insurance included as part of
your lease agreement. Why pay an insurance premium if you could get the
same coverage for a lower price?
Invest some time shopping by comparing quotes from other insurance
companies, including your existing one. Ask for discounts that you already
qualify for and adjust your coverage accordingly.

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How to lease a new car?

Whether you lease a car to get into the latest models or have better purchasing
flexibility, getting a good deal is always bound to give you a lift. Use
these guidelines to help you spot one:

Check incentives: be on the look-out for factory subsidized lease deals.
Car manufacturers realise that consumers who lease vehicles from them are
more likely to be repeat customers than those who simply purchase vehicles.
Through their leasing companies, they adjust the residual value and offer
low financing charge. Other auto-manufacturers are also starting to give
incentives on leasing, called leasing subventions. They offer these
subsidies to put slow-selling models on the street, saving you even more
money.

Set up a competitive: bidding environment to get the lowest price. If you
already have an idea in mind of the make, model and trim level of your
desired car, attempt to calculate your own lease payment before you go
shopping to avoid paying through the roof. Check online comparison tools or
use a lease calculator to check your lease payment based on purchase price.
This gives you greater negotiation leverage as you solicit quotes from
various leasing companies.

Make sure you know all the fees involved at the beginning of your lease:
you may have to pay fees for licenses, registration and title. Other fees
include acquisition fees, freight fees and local or state taxes. At
lease-end, you may have to pay a disposition fee and charges for extra
mileage and any excess wear. Be aware that some of these fees like
acquisition and disposition fees are negotiable.
Know your mileage needs: almost all leases limit the number of miles per
year by imposing typically 10 to 20 cents per excess mile over 15,000 miles
a year. If you are the kind of high-commuter who puts 40,000 miles a year
on his car, then you might end up running thousands of dollars in hefty
penalties at the end of your lease. Be smart and negotiate a higher-mileage
limit or pad you excess miles at the beginning of your lease to avoid
robber tax rates for excess miles.
Almost all leases limit the number of miles per year by imposing fees
typically 10 to 20 cents per mile over 15,000 miles per year. If you are
the kind of high-commuter who puts a lot miles on his car, then these costs
can add up quickly. Negotiate

Include GAP coverage: make sure your lease includes GAP coverage. This
covers you in the event of the vehicle getting wrecked, stolen or totalled.
Without GAP insurance, you leave yourself wide open to thousands of dollars
in leased obligations. Check if the GAP coverage is included so you dont
pay it twice.

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