|
Look into leasing
from a subsidiary of the manufacturer.
One reader leased a 1995
BMW 740I through BMW Financial that turned out to be a lemon. The
car was in the shop so often that after one year BMW financial refunded
three of months lease payments amounting to over $2400! But car problems
continued and after six months they took the car back and replaced it with
a new BMW 740I, with the same residual as his lemon BMW. Not a bad
deal. Ask your leasing company what their policy is on lemons, if
they have one.
Roll your security
deposit into the next lease.
This will save you several
hundred dollars in closing costs for the new lease and avoids the situation
where the leasing company attempts to keep the security deposit.
If you are leasing another same car from the same leasing company or dealer,
ask them to waive the security deposit for the second lease.
If they will not agree, "roll" the security deposit from the first
lease into the second lease. If you have good credit, made all your
payments on time, and returned the car in good condition, you should be
able to convince the leasing company to waive the security deposit. Use your security
deposit to pay your last month's payment.
Most security deposits are
equal to one month's payment. If your security deposit is equal to
the monthly payment, do not pay the last payment on your present lease.
But you must advise the lease company in writing, to apply the security
deposit to the last payment. This is possible if you have good credit. While you are
paying off your current lease, start saving for your next lease!
Start saving $20-$50 a month
extra to prepare for your next lease or purchase, so you will have more
money to put down when the time comes. This should be worked into
your budget, and NEVER dig into these funds. Time your leases
right and beware of 30 month Leases!
did you wonder why 30 month
leases usually pop up in December? If lease for 30 months in December,
it ends in June, 2 1/2 years later, in the middle of the worst time to
buy or lease a car, because it's not in September/October, when the new
models come out, hence there's no closeout model bargain prices.
30 month leases are useful if you don't want to lease for 3 years. Avoid leasing
after December 31.
If you want to lease in
March, you are getting a car that is 1/2 model year old. The only
time you want to lease is from September to December, or whenever the new
model is introduced. Most cars experience the bulk of their depreciation
in the first 24 months. So you can figure a car loses about 20% value
after 12 months and 10% value after only 6 months, in my reasonable approximation.
So if the new car comes out in September and you want to lease it in March,
you are leasing a car that's worth 10% less than it was in September, even
though it's a brand new car. Vehicles do decline in value.
These are normal ALG residual values used to determine lease payments,
so there's no way a salesman can deny that the car has dropped in value
since September. The only time leasing after December
31 makes sense, is if the dealer is discounting the car significantly,
at least 10%. In 6 months, the next year's new models will
be out, and then your new car will have an ALG value of typically 82% MSRP,
or worse if the car is not a historically proven high value car.
If you lease it in March, the dealer is still charging most likely MSRP,
so you are paying 10% too much for the car.
Always shop your
leases around
Just because they write
it up does not mean you have to sign. Dealers are arrogant these
days and chances are they did not budge from MSRP. Ask them to give
you a copy to study overnight. They may not, they don't want you
shopping around. If they don't give you a copy, write down what you
can, then go to the next dealer. Never sign a lease the first time
they write it up unless your are absolutely sure you got the price that
you want based on the knowledge I have given you here. If you still
are unsure, then shop around. Tell them to save the paperwork and
you'll be back. Of course they will do everything in their power
to prevent you from leaving. It's a good thing you got your drivers
license back, right? Believe me, they'll hold on to the paperwork
if you tell them to. The deal will still be there tomorrow if they
did not sell the car. If they feed you some BS about "this deal
is only good today" Tell them "So is my offer", then run, don't
walk out of that devilship. Oooops! I meant to say dealership. If the dealer tells you there
is no mileage charge if you buy the car at the end of the lease, this had
better be in writing. Don't give them your drivers
license, SS#, or credit info UNTIL you have agreed to every number on the
leasing form. They'll tell you they need them to get your credit
processed, but it only takes 5 -10 minutes to print it out. They
can wait until you verify numbers. Why give them this info if you
walk out of negotiations? They can run a credit check on you after
you leave, call you back to tell you they'll lower the price, you come
back, and they start their scam all over again. They just want the
info on you ahead of time to use it against you in negotiations.
There's no reason for them to know about you until you have agreed to buy. Lease a car that traditionally
holds its value. Payments will be lower on a car with higher residual
value (example BMW, Lexus) when the lease is up. This is because
depreciation is less. Check out the automotive lease sites,
and books for the residual values of leased cars. Don't get ripped
off here, folks, make sure the dealer's residual value is equal to or greater
than your sources, otherwise they are ripping you off. Also, look
beyond the monthly payment at all the other fees. Always do a sanity check
on the money factor, converting it to equivalent APR. If they feed
you some BS line about it being too complicated, remind them the law requires
them to tell you in writing what the money factor is. To get APR,
multiply the money factor by 2400. Here's some ranges of money factor/interest:
|
Interest
Rate = (Money Factor) * 2400
|
| If the Money Factor is... |
Then your Interest Rate
will be... |
|
.00121
|
2.9%
|
|
.00333
|
8%
|
|
.00417
|
10%
|
|
.00500
|
12%
|
|
.00750
|
18%
|
A huge red flag
should go up if your money factor is .0075. This
means the dealer is charging you 18% interest. So unless you have
bad credit, the money factor should be .00333 or below. This
is why they don't quote leases with interest rates. How would you
know by looking at ".0075" that you were being taken for a ride, straight
to the cleaners? Let me repeat this point:
Only lease a car with a proven track record of maintaining residual value.
Know the residual of any car you plan to lease before you go shopping.
Check out the Automotive
Leasing Guides, and sites for the latest residual figures on your
vehicle. Remember, the higher the residual value, the lower the depreciation,
and the lower your monthly payments! Never let your guard down
for a minute. It's easy to do in a "No Pressure" type dealer.
They act like they are being the most honest, up front people in the world.
If they are trying to make you think they're honest, don't fall for it.
They are probably getting you with a money factor equal to 18% interest,
or they are hiding the fact that they are charging full MSRP. Negotiate the price of the
car as if you were buying it. During negotiations, if you switch
from buying a car to leasing it, the dealer should still base your lease
payments on the same price you negotiated for the purchase. However,
in most cases, when you switch from buying to leasing, the dealer may
figure your lease payment on the full "sticker price" not the lower price
originally offered when you were going to buy the car. Therefore,
make sure the price (capitalized cost) you negotiated is shown on
the lease, and is the same as the price you negotiated if you first discussed
buying the car. If you trade in a vehicle
verify the trade-in credit is subtracted from the capitalized cost of the
car. The trade-in credit, and factory rebates or discounts should
be subtracted from the price of the car you are leasing. Be
careful here, they can get away without showing these numbers here, so
watch closely. Any dealer that refuses to show you this
or claims they don't have to because the law does not require it is just
a class A loser. You should immediately get out of there, and email
everyone you know so they will never lose any money to this dealer also.
Federal law requires them to itemize the trade-in. Just as in buying the car,
don't take any of the extras like rust proofing on a brand-new car you
only plan to drive for 3 years. Believe me, your car won't rust in three
years. Definitely DO NOT buy the extended warranty,
since you will only have the car 2-3 years! Remember you don't
own the car, and you already have the benefit of the factory warranty that
comes with the car. Don't pay for extras that you won't use.
Remember, you can't use an extended warranty during the regular warranty
period, no matter what anyone tells you. Negotiate everything.
Have a current car residual value book with you to lookup the prices and
negotiate as high of a residual value as you can get. Also, don't
for get to negotiate out the security deposit, bank fees, dealer service
fees, etc. It's unlikely they'll drop the security deposit, though.
These fees are just icing on the cake for them that would be better served
in your pocket. Even the money factor should be negotiable. If you
want to pay 8% interest, ask for a money factor of 8/2400=.00333.
You can tell if they are trying to charge you 18% interest because the
money factor would be 18/2400=.0075. A 2.9% interest rate would
have a money factor of 2.9/2400=.0012. Now you can see the range of money
factors from low to high. You should watch this number like a hawk
and check all their math. Bring a calculator that does lease payments,
and always have a money factor/interest rate conversion table handy.
the problem is many dealers don't tell you what the money factor is, they
lie about it, and you believe them because you don't know how to verify
the numbers. Tell them to PUT THE MONEY FACTOR IN WRITING.
Don't let the dealer try
to tell you the depreciation is calculated by subtracting residual value
from MSRP. This gives them an excuse to put MSRP on your leasing
papers, which you do not want. You will end up like Homer Simpson
if you listen to the dealer. Depreciation is calculated
by subtracting residual value from the adjusted capitalized cost,
which hopefully is lower than MSRP if you negotiated properly.
Don't end up like Homer Simpson (Dooooooh!) If they base it
on MSRP, you are paying more depreciation and thus higher monthly payments,
which means more profit for them and less money in your pockets.
Also, avoid as many extras as possible, as these increase your depreciation
(by increasing cap cost).
Getting
Out Of Common Leasing Dilemmas
Many
people email me with some nasty situations they got themselves into while
leasing so I listed these common dilemmas here, and the least painful workarounds
to get you out of the mess. Read my online article about using the ALG
Residual Values. You'll need it to
calculate your lease payments, and look up dealer cost for cars and trucks.
Scenario
#1: You recently leased a car, now you lost your job
and want out of the lease.
This
is a nasty one that happens to many readers. Your best bet is to
just keep the car and try to continue making the payments, grin and bear
it, until you find a job, because there is no way out. If you ran
into financial hardship, do what you can to protect your credit rating.
First, I recommend going to our free download area, and getting the Excel
budget spreadsheet. Then enter all your current financial obligations
and re-evaluate your current budget, finding places to cut costs.
Don't stress out too much, take charge of the situation, get out there,
visit some web sites on how to interview for a job and write resumes, and
go get yourself a job.If
you turn in the car early, they will slam you with big penalties and there
is no way out. Many people don't realize that if you terminate a
lease contract, you still owe the leasing company the remaining payments
plus early termination penalties, so you may as well stay in the lease,
because you owe the money no matter what. Your first inclination
might be to trade it in on another car, which is a bad choice. If you end
up at an unscrupulous dealer, he may offer to payoff your lease "no matter
how much you still owe". Also, they give you $4000 less for the car
on the trade-in. So he pays off your current lease but you still
owe all those remaining payments, and early termination penalties and all
this gets financed into the next lease. Now you are paying off 2
cars, and you don't notice what they just did to you because they spread
the payment out over 60 months to make the payments lower. On top
of that, they tell you that they just saved you money. You think you're
saving money, but they just screwed you, and now you are even worse off
than you were before. Some salesman don't care you lost your job,
they'll take even more advantage of your situation. Another
option you have is to get the lessor's permission to sell the car privately.
To do this, you must get a loan to pay the early termination penalty, remaining
payments, plus buy the car for the residual value. Then you turn
around and sell it for market value, hopefully making enough to pay back
the leasing company most of what you owe, and then pay back the bank for
the loan you took out to buy the car. Most likely, though, you will
end up losing some money, you'll still owe some money to the bank, and
you won't have a car. But at least you won't have $450 monthly payments
anymore. Then go out and buy a real cheap used car to get you through
the mess until you get back on your feet. There's a lot of risk here
because you don't know how long it will take to sell the leased car.
Remember, there is no cheap way out of a lease. You are stuck! If
you must get out of your lease, at least trade it in on a car that is much,
much, much cheaper than the car you are leasing now to make up for the
loss you'll take on trading it in. Perhaps try a 5 year old used
car, and this time, buy it, don't lease it, you do not belong in a lease.
Don't buy any extras like window etching, paint sealant, fabric protectant,
extended warranty, or credit life, and don't fall for their scam that the
bank "requires you to buy these extras". If they pull that on you,
go elsewhere. Moral Of The
Story: I
can't stress this point enough. If you think your job is in any way
in jeopardy, do not even consider leasing! You should have at least
3 months worth of lease payments in the bank or you should not lease a
car.
Scenario
#2: You are 1 or 2 years into a 3 year lease
and you want out, or you are moving to another state.
This
is a nasty one. Too many people lease a car thinking they can just
move to another state with it or get out of the lease when they move.
Your best bet is to just keep the car and try to continue making the payments,
grin and bear it. If you ran into financial hardship, do what you
can to protect your credit rating. If you turn in the car early,
they will slam you with big penalties and there is no way out. A
dealer may offer to payoff your lease "no matter how much you still owe",
but he just pays off the lease and the remainder that you are upside down
on gets financed into the next lease. If you move to a new state,
the taxes are tricky because now your monthly payment changes. Another
option you have is to get the lessor's permission to sell the car, and
you just pay the early termination penalty, plus buy the car for the residual
value. Then you turn around and sell it, hopefully making enough
to cover the amount you owed. most likely, though, you will end up
losing money. You can see these solutions are very tricky, as you
try to determine which one is the least painful. Debt can
only be created, not destroyed. Most leasing companies don't want
you leaving the state with their car. Remember, you don't own it,
they do. There may be more fees associated with moving if they even
allow it, and there may be expensive registration for the state you are
taking the car to. Moral Of The
Story: I
can't stress this point enough. Leasing is not right for most people,
so you must try to guess what will happen in 3 years. Will you be
moving out of state or having a kid and needing a bigger car? Then
don't lease. You may have no idea what's going to happen in 3 years.
You could get divorced, lose your job, want another car, or be stuck with
a lemon. At least if you bought the car, you could always sell it.
Impulsive buyers seem to get caught up in this more often. If you
get into a 24 month lease, your payments will be a little high but only
for 24 months and then you will be back to 0 again. Actually Ford Motor's
most popular leases are the 24 month types, but avoid doing them back to
back. Whenever you buy a car, always leave at least 3 months worth
of payments in the bank. If you can't afford to do this, you are
buying too much car!
Scenario
#3: Your lease ends soon and you realized you'll have
50,000 miles on a 36,000 mile lease.
There's
a few ways to help yourself, none of them are cheap. At $.15 a mile,
you'll have to come up with $2100 at the end of the lease, or just buy
the car at the end of the lease, and there is no mileage penalty.
First, start saving the money now, as any solution to this problem will
cost you some. Estimate what your mileage will be at lease end and
start saving the penalty. If you can't do that, go to a dealer and
trade it in, lease another car, or buy your current lease to avoid the
mileage penalty. Your penalty for trading early is the amount of
negative equity in the vehicle. If you
have too many miles on a lease, you can buy the car at the end of the lease
for the residual value, then you won't have to pay the mileage penalty.
But the residual value of the car might be more than market price of the
car, so you could still end up losing.Moral Of The
Story:
If
you drive a lot of miles, you should not be leasing. You can purchase
extra miles up front, but that just makes your lease more expensive, and
you don't get refunded for unused mileage. Monitor your mileage and
keep it under 1000 miles per month. If you go over, it's time to
cut back on driving next month. Kind of a pain isn't it? Salespeople
should not lease. They put on way too many miles. They may
have a mileage package they can buy if they must lease.
Scenario
#4: During the lease, you total the car in a wreck,
or it gets stolen.
You'll have to wait for
the insurance company to pay the claim. Your payments must be current
to the date of the loss, and you must have paid all 'other' charges such
as parking tickets, delinquent taxes, etc. You'll have to make the
deductible payment to the leasing company if the market value of the vehicle
were less than the balance. If there was still a difference, the
loss would be written off, meaning the gap insurance would cover the rest.
Once the insurance company pays the claim to the leasing company, the account
should be closed and you can go get another car. Push the insurance
company to get the claim settled ASAP before the vehicle is recovered.
Insurance companies are very slow about paying claims like this.Moral Of The
Story: If you lease
a car, make sure you buy gap insurance, but don't buy it from the dealer
unless you like paying double. Buy it from your regular insurance
agent. Most leasing companies require you to take out huge amounts
liability insurance. Make sure you do not cut corners there.
Find out ahead of time what you are covered for, and how your lessor handles
totaled or stolen vehicles.
Scenario
#5: You just signed a new lease, and a few days
or months later you want out.
Oh, man are you in deep.
There's not a thing I or anyone can do to help you. There are however,
some tall buildings I could recommend to you to ensure that you don't survive
the jump. People think that after a couple of months they can just
get out of a lease. What you need to be aware of is that a lease
is much worse than being married, it's a life sentence for the term of
the lease. A LEASE IS A CONTRACT!
The reason for this is the lease is a promise from you to the lessor that
you will provide them with an agreed number of monthly lease payments,
each containing profit for the lessor. If you try to get out of the
lease, you are failing to honor your end of the contract and robbing them
of their profit. It's like someone offering to buy your house, then
taking the deposit check back because they realized they can't afford it.
It will cost you big time if you want out unless the dealer wants to show
you mercy (yeah, right). Maybe they'll take back the vehicle if you
lease a more expensive one. Your payoff penalty could be in the thousands,
and many times the dealers lie to you, saying early termination penalty
is only $300. News flash: That $300 is just the Early Termination
Payoff administration fee, not the penalty fee. Review
the leasing glossary. They are just trying to prevent you
from knowing what the real cost is, to prevent any second thoughts about
signing the lease. Also, remember I mentioned earlier that they can
pad your early payoff penalty because we don't know how it is calculated. Moral Of The
Story: If you are about
to lease a car, make absolutely certain you are prepared to do so.
Analyze the down payment and monthly payments and determine if you can
afford them. You should have done it way before car shopping so that
you already know how much you can afford. Don't sign a lease thinking
you can fall back on the 3 day buyer's remorse right to cancel trick.
Most states do not have laws that allow it, although many people think
they do. As I stated before, folks, I don't answer emails with this
question: I just signed a lease yesterday, why won't they let me
out? Why did you sign it?
My
lease is expiring soon, what should I do?
Now that your lease is coming
to an end, you have some decisions to make. It's time to bring Supermobile
LX back to my fictitious dealership Crazy Jeff's Automall. Do you want
to buy the car from me or do you want to return it and lease another new
car? If you were happy with your lease and you know you got a good
deal,
then maybe you'll want to lease again. If you want a new car every
three years, why not just lease for consecutive 36 month terms? Your
monthly payments will be less, but you'll have no equity in the cars. It's
usually more expensive to buy the vehicle at the end of the lease, than
the deal would have been if you bought it initially.But if you really liked the
vehicle, and it was trouble free, then it might be worth buying it.
What you do, is compare the residual value (what you will buy it for) to
the market value of the vehicle at the time. If the vehicle has a
market value higher than the residual value, it's a good deal to buy it.
You could even turn around and sell it for a profit over what you just
paid off on it. On the against side, think about this: when
a 36 month lease expires, your warranty does too, or sooner if you had
a lame warranty. This is the time when things start to go wrong with
cars, and it's like a domino effect. All of a sudden, you're paying $500
here, $700 there, your compressor goes, the alternator goes, your vacation
goes. Now you have loss of time and car rentals when you could have
just bought a new vehicle. If you decide not to buy car at the end
of the lease, make sure there are no "end of lease" or disposition charges.
Most leases actually charge these up front, so negotiate them out of your
lease at signing. At this point, add up all the money you spent on
the lease including all the up front fees and ask yourself were you happy.
If you don't have a warm and fuzzy feeling, it may be time to buy a car
instead. Hopefully this article will leave you with a warm and fuzzy
feeling on leasing because now you know what pitfalls to watch out for.
Start checking out good car buying sites like Cars.com,
InvoiceDealers,
CarsDirect ,
Autoweb,
Autos.com,
Yahoo!Autos,
Edmunds.com, and
Car.com
Remember the disposition
fee?
The What? Many people
completely forget about the disposition fee, or never knew about it to
begin with, and if they leased before 1/1/98, it was buried in the fine
print a the end of the lease. If you don't but the car at the end,
you pay a disposition fee up to $400. Salespeople usually lie to
you when you lease the car and tell you "Just return the car at the end
of the lease and you owe nothing". If you decide not to buy the car,
don't let them charge you more for the disposition fee than the lease contract
calls out. Disposition fees are now required to be listed on the
front page of the lease contract, so that you'll be aware of it's existence. A Few Points To
Remember If You Buy The Car At Lease End
Make sure they don't charge
you more for the car then the residual value listed in the lease.
A dealer tried to pull that stunt n one of our readers and luckily he had
read this article before returning the car and put a stop to it.
Also be sure they don't charge you more for the purchase option fee than
what is listed on your lease contract. Make sure you have the contract
with you so you can show them everything in writing. Don't Tread On
Me!
Leases usually require a
good set of tires on the vehicle when you return it or they will bill you
MSRP for a new set, whereas tire shops usually give discounts, so make
sure the tires are in good shape, and your mileage is not over the 36000
mile limit. Make sure you do not have mismatched
tires on the vehicle or they will charge you for new tires.
I hope you saved all your maintenance records, in case they try to claim
you neglected to care for their car. Don't Forget Your
Security Deposit
If you paid a security deposit
to lease this car and you don't plan to buy or lease through this dealer
for your next car, make sure you get your security deposit back in its
entirety. Excess Wear and
Tear
Don't give them a reason
to claim excess wear when you return the car. It's fairly cheap to
it professionally detailed, vacuumed, waxed, and all the major stains shampooed
out. The car looks better, and gives them less chance to claim excess wear.
If the only damage your car has is a few minor scratches, tell them it's
normal wear and tear for a car that age. If you really feel they
are just getting greedy, and making up excess wear, tell them how upset
you are. Tell them you are going to email the president of Supermobile,
and tell them just how unsatisfied you were at Crazy Jeff's Automall, with
Mr. Greedy's name mentioned in bold letters. Mention that you are
going to tell the president that you are never again buying one of their
cars, and you are going to tell every single person you know. Just
make sure you are in the right before firing off an angry letter, and make
sure it is professional while still getting across the point that you are
angry. Make it short, and to the point, printing out on no more than
a single page. Leases have a lot of up front
non refundable fees, that I feel could be better applied toward your equity
in a purchase instead. At least you're getting something back
when you buy. If you do move into another lease, make sure you can
get a lease with true 0 down, and
no more than 36 months.
Too many people get antsy after a year and want out.
| If you feel you've been
cheated on a lease, or you suspect your early termination penalty has been
padded, try automotive expert, author, and consumer advocate Mark Eskeldson's
site, which provides free information and a worksheet that helps you determine
if you got ripped off on a lease. You are also invited to mail him
evidence, as he consults with many trial attorneys and is often used as
an expert witness in successful cases brought against dealerships.
He's a great guy, and knowledgeable in automotive litigation. He just loves
dirt, so pile it on.
CarInfo.com
|
Loan/Lease
Calculators:
Read
my online article about using the ALG
Residual Values. You'll need this
vital data to calculate your lease payments, and look up dealer cost for
cars and trucks. Every person who leases should be using the same
type of leasing software that the dealers use. Without it you're
sailing the ocean of confusion, and they'll swallow you whole. I
would never in a million years lease a car without using my lease software
first.
|
Lease
Software with ALG Residual Values
We like to use Expert Lease Pro because it's so simple.
Choose your car from the menu. It lists the dealer invoice cost and MSRP for the base model and options. Check off the options and it
supplies you with invoice and MSRP pricing. Look up the residual
value for your vehicle using Expert Lease Pro's built-in Automotive Lease Guide
(ALG) residual values. Select the sales tax info, and interest rate, and the
software tells you what your payments will be. It's used by Attorney
Generals to sue crooked car dealers. |
Now that it's all said
and done, many people still argue with me, questioning why it's so important
to negotiate the capital cost of the car. I can tell whose been conditioned
by the salespeople already. A few people have asked me "Jeff,
if the monthly payment is so low, why does it matter if the dealer charges
MSRP?" This is just what the dealers want you to think.
I'll tell why it matters: Your
payments could be even lower! Make sure you practice
with the lease software and my free Excel lease spreadsheet before you
buy. Don't consider
leasing unless you understand all the concepts and have read this entire
page!!
Check
out How to read misleading ads
On
this last page we'll examine some dealer ads that I've scanned in, plus
I drew one up of my own fictitious dealership to illustrate how dealers
can mislead you with newspaper ads. This is a must see so make sure
you check it out. Then comes the summary and closing remarks, then
your out of here!
The information on this site is Copyright © 1996-2006 ConsumerNet, Inc. This site is solely for your personal use. You may
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