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Car Leasing 101 - Another Form of Financing - Nothing More

By
Real Estate Agent with J. Rockcliff Realtors BRE #01467034
   You want to get a new car and you know that there may be good reasons to consider leasing that new vehicle but you don't know exactly what those reasons are.  Well, let me get you started.  First, in order to compare purchase financing to leasing, let's first make the point that the dealer should be indifferent.  They get the sales price regardless of how you choose to acquire the vehicle. I will admit that dealers have enjoyed some upside from leasing because people don't understand how the numbers work on leasing so the dealers may be able to derive a higher selling price if all you focus on is what you are to put down and what you will pay monthly. 

   The basic reason why people lease is because the upfront payment and the monthly rental is usually less than that which you would pay if you obtained a vehicle using a straight loan. The second reason is that people are more comfortable with "writing-off" the business supported operating cost of a lease than to take depreciation on an owned vehicle.  Those two reasons aside, you should consider that a lease is not a great deal different than a loan.  It is a form of financing. Yes, you don't actually own the vehicle but you do have similar if not identical control.  Let's say this differently. Let's say the dealer said to you "You can buy the car and the manufacturer will agree to buy the car back from you in 36 months at a predetermined price (residual) equal to the then existing financing payoff so long as the car does not have over 36,000 miles. At that time, you can (a) either sell the manufacturer the car at that price thereby using the proceeds of the sale to payoff the financing and thereby allowing you to walk away, or, (b) you can continue to pay the monthly payment for up to a year by extending the lease, or, (c) you can find a buyer and keep the difference between what they agree to pay and the remaining balance of the financing (same as the residual), or, (d) you can keep the car indefinitely and pay off the balance of the financing - same as the residual".  Saying it that way, it seems as though your options are similar to ownership.  And, you know what? They are the same. 

   Once you understand that leasing is not some suspicious way to get you to pay for something that you don't own, you can get down to the basics.  There are two important elements - the money factor and the residual. The dealer will quote you some mysterious factor that sounds something like "point zero zero something".  I'm going to use a real case situation for sake of clarity.  I assisted a client of mine who was acquiring a 2007 Honda Accord EXL-V6 3.0L Sedan with Navigation.  That car has all the bells and whistles and doesn't need anything else.  As a matter of fact, I don't thing there were any options to be had. That car has a MSRP of $29,995 and the negotiated price was $26,339.  The quoted factor was point zero zero zero nine - .0009.  What is that you ask?  Well, that is actually the nominal rate of the financing.  You would simply multiply the factor by 24 to get the actual nominal financing rate. In this example, the rate is 2.16% (.0009 x 24).   The other important element is the residual which in this case was 56% based on the included mileage requested.  That residual is applied to the MSRP - not the negotiated sales price.  So, the larger the discount that you are paying, the lower the factor and the higher the residual, the lower the amount of down payment and monthly payment you will have to pay. There are other items of note including an "acquisition fee" that is not usually present in loans. That amount varies from car to car but the acquisition fee was $595 on this particular vehicle.  With all taxes (including local sales tax rate of 8.25%), license, titling, registration, and doc fees, this vehicle went out the door for $3,000 drive-off and the monthly payment was $277 for 36 months and no security deposit had to be paid.

   Now, if one wished to purchase finance this vehicle over 60 months and you could get a rate of 1.9% from the manufacturer and you want to put down the same $3,000,  the monthly payment would approximate $450.  So, the lease actually saved my client $173 per month and left her with a boatload of options at the end of the 36 month lease term.  Clearly, you would not be building up as much equity in the car, but, why does that matter that much? Some would say save your money for investments. Cars are not investments. Anything that depreciates as a normal occurrence is not an investment. My advice - invest in things that appreciate not in things that depreciate. 

     To properly reconcile the two forms of financing, the loan would have about $10,600 of unpaid principal balance remaining after 36 months. The residual on the lease would approximate $16,800. The difference is about $6,200 of equity that could have been built up under the loan that didn't build under the lease. However, the $173 monthly savings under the lease would derive about $6,700 if placed into a 5% money market account. So, when you compare the two financings in this manner, they truly are very similar. Hence, the argument that leasing is just another form of financing.

   When inquiring about a lease, you will have to tell the dealer the term and yearly mileage that you wish to have as part of the lease. Also, you should know your credit score.  Once you know these, you can ask for the following: money factor, residual, security deposit (usually nothing if credit is good), acquisition fee, registration & titling and doc fees. From there, you can actually derive your own spread sheet to determine the cost. The negotiation of the selling price of the vehicle is a separate issue not unlike your normal negotiation of price when buying for cash or getting a loan. 

    Two other minor points - under a lease, you only pay sales tax to the extent you pay rent - not on the entire cost of the car upfront. Secondly, leasing for a term that equates to the warranty period will ensure that you are never exposed to large out-of-pocket maintenance items. So there you have it - Vehicle/Auto Leasing 101.

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