Answers will shed light on the essential elements of a good lease deal
YAHOO.COM
Posted By Philip Reed
If you don't know a lot about car leasing, you probably don't even know what questions to ask the dealer. Relax. While there are many pieces to a lease agreement, there are just a few elements that really drive the price.
If you ask the right questions, you can more accurately evaluate a lease deal. We will reveal those critical areas and show you what is important to getting a low monthly payment — and an overall good lease deal.
1. Are there any lease specials?
Many carmakers periodically offer highly discounted lease specials to pump up interest on slow-selling models, says leasing expert Joe Spina, Edmunds.com's director of remarketing. These specials could provide a shortcut to substantial savings for you.
However, check the fine print of the lease ad to see if there are any additional expenses. Often, the quoted monthly payment does not include sales tax and fees and may require high drive-off fees (similar to a down payment when you buy a car). Check Edmunds' Incentives and Rebates section and the leasing deals of the month for current offers.
2. What is the car's residual value?
A high residual value "gets you 80 percent of the way to a good deal," says Sergio Stiberman, CEO of LeaseTrader.com, a company that helps consumers transfer car leases.
The residual value is how much the car will be worth at the end of the lease. This figure is an estimate, set by the leasing company and expressed as a percentage (for example, 55 percent of the original value) or a price (the car will be worth $20,000 three years later).
Here's why the residual value is important: When you lease a car, you are paying for the amount of the car's value you use. For example, if you lease a $30,000 car for three years, it will be worth about $18,000 three years later. That means you used $12,000 of the car's value. Divide that $12,000 by 36 months and you get $333, which is approximately your monthly payment (plus interest and taxes).
To demonstrate how significant the residual value is to the monthly payment, let's look at a $30,000 car and apply three residual values to it:
Residual Value
|
Depreciation
|
Base Monthly Payment
|
55%
|
$13,500
|
$375
|
50%
|
$15,000
|
$417
|
45%
|
$16,500
|
$458
|
Another way to think of this is to consider that a good residual value is 55 percent and a fair one is just 45 percent. The difference between the good and fair residual values is nearly $85 each month, or $3,000 over the three years of the lease.
So when you're shopping for a lease, the first rule of thumb is to look for cars that hold their value: the ones that have high residual values. If you calculate your own lease payment, you will see how important the residual rate is to the monthly payment.
You can always ask the dealer for the residual value of the car you are considering. He will probably give you a percentage between about 45 and 60 percent. Or, you can research residual values by reviewing the vehicles mentioned in this article about retained value.
3. What is my interest rate?
The interest rate is called the "money factor" in leasing jargon. It's one of the few elements of a lease you can negotiate, says Oren Weintraub, president of Authority Auto.
The dealer converts the interest rate into a mysterious-looking decimal number. To convert the money factor back into an interest rate, multiply by 2,400. So if the money factor is 0.00125, multiply it by 2,400 to get 3 percent.
Of course, the leasing company will give you an interest rate that is based, to some degree, on your credit. However, when manufacturers are trying to attract shoppers, low interest rate offers abound. So when you ask a dealer, "What is my interest rate?" he might respond by saying, "Well, the money factor is 0.00125." Convert this to an interest rate and make sure it is the rate you deserve for your credit score.
4. How many miles does the lease include?
Sometimes, you hear about what sounds like a great lease deal, but learn (by asking) that the lease only includes 10,000 miles a year, rather than the 12,000 miles a year that's the industry standard. Now the lease isn't quite as good a deal as it appeared at first.
First of all, if you exceed 10,000 miles a year (or 30,000 miles for three years), the dealer charges you from 15-20 cents per mile. So, if you don't ask how many miles are included, you could be in for a nasty surprise at the end of the lease. Also, quite simply, the lease has less value because you can't drive the car as far as with a normal lease.
5. What drive-off fees do I have to pay?
This is a great question to ask if you see a newspaper or TV ad offering a low monthly lease payment. You also want to ask the dealer this question if he offers you a "killer" lease deal.
Drive-off fees are a combination of fees and a down payment.
The effect of a bigger down payment is lower monthly payments, of course. Ideally, though, you want to pay as little as possible up front, and never more than $2,000 down. The more you pay up front, the more you have to lose if you total the car shortly after you begin the lease.
6. What fees does the lease have?
Furthermore, fee amounts are different from one lease company to the next. In recent years, fees have crept up from $300 to more than $650. Fees may be hard to remove, but it doesn't hurt to question them, Weintraub adds.
7. Does the lease contract allow it to be transferred to a new owner?
Today's consumers expect more flexibility and want to be able to change cars more often, which used to be difficult to do under a lease contract, Stiberman says. It's a good idea, therefore, to ask ahead of time if the contract allows you to transfer the lease to another person for the remainder of its term.
Most of the major leasing companies allow such transfers, but there are some exceptions. While the dealer may not know this information, the financial institution will be well aware of it. If you think you might want to exit the lease early, be sure to ask before you sign, so you will know what your options are.
The Q&A That Reveals the Deal
As you get answers to these questions, you will get a much clearer picture of the value of the lease you are considering. You will also demonstrate to the dealer that you've done your research and have a grasp of the essential elements of a lease. Consider the answers carefully and you will have a lease that will save you money and provide an enjoyable driving experience.
Related Video: Tips to save money at the end of a car lease
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