Car Leases — How Car Leases Work

Car Leases — How Car Leases Work

Car leases seem to be gaining in popularity these days. I won’t speculate on the reasons why but it probably has to do with the mega prices even the smallest compact has attached to it.

Another reason that might be as valid as the super high car prices is car leases have gone from bad to ho-hum to worth it in their pricing and structure. Obviously if you are looking at car leases you pay attention to the details of those car leases. A few wrong turns will cost you.

Leasing is especially attractive today as I just mentioned. What makes them attractive is the ability to lease some new cars for less than the loan payments on a newer used car. This of course depends on the make and model of the used car you are considering.

If you don’t know how to define the cost of a lease, here is what the car lease people tell us. It is the difference between what a vehicle is worth now and what it’s expected to be worth when you return it, this is calledthe residual value plus interest and fees.

It stands to reason then that the more a car is forecast to hold its value, the less you pay. That doesn’t mean a car lease is your way to get behind the wheel of a new car. But, it does mean it is a way that might work for you right now.

Supply is also a factor in the car leases equation. Currently auto manufacturers believe the supply of used cars is on the low side, so they’ve priced residual values higher according to the experts in the car lease field.

Most people don’t know they can negotiate any lease offer they are presented. Leases have always been portrayed as a take it or leave it financing arrangement. That isn’t true.

This isn’t an across the board figure but the experts say a dealer will typically drop the sticker price by 5% or better if you come out of the gate with haggle as your price lowering strategy. The sticker price goes by another name should you encounter it in your negotiations. It is also called the capitalized cost.

A lease has something called a money factor hidden in the bowels of the paperwork. This is the number that determines your interest rate. Become a self-serving Sherlock Holmes and uncover this number. It too can be negotiated. The lower you get it the less your car lease will cost you.

You can also use it as a comparison tool. If you are shopping several autos for your next car, check out all the car leases put in front of you. Your decision may be made simply because you have found the lowest number, i.e. money factor.

Be warned about being pressured to put more money down in exchange for a price break. That probably isn’t in your best interest given the low rates already in existence. Shop till you drop if leasing is right for you.

Sometimes you’ll run across a sales presentation in which the term of the lease is stretched out. It is what is called along-term lease. Be wary because these long-term car leases can cost you more in the end.

For example, not only are you making payments for a longer period of time but your typical warranty which runs only three years will leave you with extra years of out of pocket maintenance costs on top of those lease payments.

Both you and the car dealer might be better off with a three year car lease payment term. The dealer gets you back in three years and has the opportunity to sell you a new car and you get to return the vehicle in three years.

Most experts agree three years is long enough to make a yes or no buying decision on this particular make and model. If you are satisfied with it and its performance you are more likely to stick with that model.

Be aware when you read your lease to look for the number of miles you can drive per year. Most leases put those miles between 10,000 and 12,000 a year. If you exceed those miles, you are likely to owe upwards to an extra 20¢ a mile.

This means if you exceed your mileage cap by 1000 miles and your penalty rate is 20 cents you will pay an additional $200 when you return the vehicle. If you drive more than the cap rate, ask if the lease will let you pay an additional fixed amount in order to receive a higher mileage cap.

Gap insurance is an insurance that pays the difference between the insured value and the higher amount you may owe the leasing company if you total the car during your lease period. Ask if this gap insurance is included in the lease. You do not want to be stuck paying the premium.

Sometimes people need to exit their lease term. Any number of circumstances can force an early exit. But, the car leases sometimes don’t make it easy. They have built in restrictions that force you to keep the car.

On the other hand, if the restrictions are mild and don’t force a full term on you, you can find a new owner. You give them the car by a process called transfer. Don’t worry if you are not familiar with the details. The car leases experts know how to do it and may even help you find a new owner.

Given today’s used-car prices are high you may want to make the remaining lease payments and buy the car for its residual value and then resell it. There is no guarantee you will turn a profit but you might. Even if you don’t turn a profit you could break even. That is better than losing your shirt.

Car leases are a way to get into a new car. The more you understand car leases the better the deal you can negotiate.

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