Just because you are leasing a car
instead of buying, don't assume that you don't have to be on your
toes. You should still be skeptical about promises that sound too
good to be true. Leasing is still a financial commitment and many
consider it to be more responsibility. You are still signing a
binding contract, so you must be vigilant in negotiating and
checking all the terms. When you buy a car, you can sell it if you
don't like it. When you lease a car, you are stuck with it
throughout the lease term.
Here are the top 10 booby traps when
leasing a car:
1. Mileage meltdowns
When leasing a vehicle you are
allowed a certain number of miles each year. Often dealers will
offer a low-cost lease, but set the mileage allowance low - like at
10,000 miles per year. If they charge 10 cents to 20 cents for every
mile you go over and you drive 13,000 miles a year, it will add up.
For a three year lease with a 20 cent per mile overage charge, you
will owe the dealer $1,800 for those miles. That figures in at an
extra $50 a month.
2. Early-termination tango
Dealers will lure customers into a
new lease by saying that you can get out of your existing lease
early. You can, but you will pay for it.
For example, you lease a $20,000 car.
In two years, you've paid $2,400 in payments. The car has
depreciated to $16,000. To terminate the lease, you will have to pay
the difference between the $2,400 you have already paid and the
amount of depreciation ($4,000). You will owe $1,600.
Some leases may require that you pay
all of the remaining payments. A dealer may suggest that the
payments just be wrapped up into the new lease. This means that you
will end up paying much more.
The residual value - how much the car
is worth at the end of the lease - is a critical factor in leasing a
car. For instance, the dealer figures that the car is worth $20,000
will be worth $10,000 in three years and calculates your monthly
payments to cover that loss in value. Different lenders will
calculate the residual values differently.
A lower residual value leaves you
with a higher monthly payment. With a $15,000 residual value on a
$25,000 car, you will have to cover the $10,000 difference. In a 36
month lease, your monthly payments would be $277.77, plus any
interest, taxes and leasing fees. If a different lender figures that
the car will only be worth $13,000, your monthly payments jump to
$333.33. A lower residual value is good if you decide to purchase
the car at the end of the lease. Then you will pay the residual
value, plus any purchase-option fee.
4. Down payment double
Many leases that are advertised with
very low monthly payment are hiding a huge down payment in the fine
print. You should keep in mind that your monthly lease payments
aren't the total cost of your lease. Factor in the down payment. If
you put $4,000 down on a 36 month lease, your real cost is around
$111 more than your monthly payment. A dealer may set up your
monthly payment incredibly low and just raise up the down payment
requirement. If you make big enough a down payment, you won't have
to make any monthly payments at all.
5. Purchase-price parade
Some dealers will try to get you into
a lease contract by comparing the payments you would make under a
lease with the payments you would make to purchase the car. Keep in
mind that the main difference is that at the end of the purchase
term, you own the car. When the lease ends, you own nothing.
6. Price doesn't matter
Even though you aren't buying a car,
just leasing, you still have to worry about the price of the car.
Your monthly payment is based on the price of the car. A car selling
for $24,000 has a capitalized cost of $24,000. Its residual value is
$12,000 in three years. Your monthly payments will be $333 to cover
the depreciation. But if the cost is $22,000 instead, and the
residual value remains the same, your monthly payment becomes $278 a
month. Each month you will save $56. Make extra sure that the
capitalized cost is not more than the MSRP.
7. The fee focus
You need to know the amount of fees
that you will pay in addition to your monthly payments. These fees
can include acquisition, purchase option and disposition fees.
Acquisition fees, or document fees, are charged at the beginning of
your lease. They usually total to $500. A disposition fee is charged
upon the return of the car. This covers the dealer's cost to dispose
of the car. These fees can be several hundred dollars. The
purchase-option fee is the amount it would cost to purchase the car
at the end of the lease. The amount varies and depends on the
residual value. These fees are one time, but they still affect the
overall cost of the lease. You should negotiate everything and
consider them in your decision.
8. Hidden-cost hideaway
Don't assume that the monthly lease
payment that you are quoted is what you will be paying. It could
have added sales tax or license fees. Ask what other ongoing charges
will apply, so that you don't have a shock when the first payment is
9. Term trick
A dealer can get you to accept their
deal at a higher price by simply manipulating the term of the lease.
For example, you are looking at buying a car with a sticker price of
$25,000. You haggle down to $22,000 and the dealer sets the residual
at $12,000. That means that your 36 monthly payments will be $277.77
plus any taxes, interest and fees. But you try to get the price down
by telling the dealer you can only afford to pay $250 a month. He
goes and talks to the manager for you and says he can do it. But the
term of your lease has now gone up to 40 months, and he probably
won't point this out. You haven't saved anything.
10. Interest rate
There is no annual percentage rate
for a lease. No matter what. If you are told there is, it is either
illegal, inaccurate or not really APR. The dealer may try to confuse
you about APR and the "money factor."
The money factor is similar to an
interest rate, but it isn't quite the same. It determines how much
you will pay in finance charges over the life of the lease. The
higher the money factor, the more you will pay. It is written in a
decimal such as .00260. You can convert it to an equivalent interest
rate by multiplying it by 2400.
An untrustworthy salesperson may try
to tell you that you have an APR of 2.6 on your lease. Then he
applies the money factor of .00260. You think you are paying 2.6%
interest. But you aren't. Multiply .00260 by 2400 and you will find
that you are paying 6.24% interest equivalent.
You can take the amount back the
other way too. If a dealer tells you that they will equal the rate
you've been offered by a bank, take the rate and divide it by 2400.
For example, if your bank says that you can have a rate of 6%,
divide it by 2400 and you have a money factor of .0025. Then ask the
dealer what the money factor is and if it is higher than .0025, then
you know that the equivalent interest rate is higher than
When leasing a vehicle, ask the
dealer about the money factor on their leases. This isn't something
that they routinely disclose. It may not even be in writing on your
lease contract. If the dealer will not tell you, go