Leasing a Car
You might have heard that leasing a car is never a good idea. Well, quite frankly, I would strongly disagree. Several of the features of leases make them ideal for folks in particular financial situations. You should understand that leasing is a fairly complex process and calculation. If you approach it the same way that you would buying a car, you’re probably not going to get a good deal.
In general, a great resource for tips on car leasing is the LeaseHackr Forum. There’s a ton of information there, and it can be really overwhelming. But reading the resources and some of the posts will help you to understand the leasing process.
Also, it’s worth pointing out that as of the time of this writing there is a global shortage of new cars and dealers are less willing to negotiate. This means that it’s going to be hard to find a good deal on a new car (and you only lease new cars). If you can hold off on obtaining a new car, I recommend doing so. But if you’re in a bind and need a car, this guide can help.
Let’s delve into the tips!
Is leasing for you?
Leasing isn’t for everyone. There are a few scenarios in which leasing a car makes a lot of sense. Primarily, you can consider a lease if you meet these requirements:
You don’t drive more than 15,000 miles per year (sit down and calculate how many miles you drive per week and then multiply by 52)
Continuing to have a car payment isn’t a problem for you
In general, you take reasonable care of your car
John’s Top Tip: You need to decide your personal value proposition for a car. Do you like the peace of mind knowing that you’ll always be driving a car that’s no more than 3 years old? Does it bother you to always have a car payment? Would you want to buy your car and keep it as long as possible in the hope that at some point you’ll own the car and not have a payment? Or do you want to put as many miles on it as you want without worrying? There’s no right answer but it’s important to clarify what car ownership means to you before you commit to a lease.
2. Leasing can help you if you’re trying to develop an emergency fund
How so? Well, the hardest part of trying to build an emergency fund is running into unexpected expenses along the way. We’ve all had unexpected car repairs pop up. But a car lease should only be taken out for no longer than the duration of the manufacturer’s limited warranty. If any repairs are needed during that time, the manufacturer will cover it (and you might even get a loaner while the car is in the repair shop)! The result: zero dollars of out-of-pocket cost for any repairs. You might be able to find a reliable used car that won’t cause you mechanical issues while you own it, but that’s a risk (and you might not get a loaner when a repair comes up unless you pay for repairs at an expensive dealership).
John’s Top Tip: The dealer’s warranty will not cover tires, wear and tear on the interior, or body damage. The car will need to be returned at the end of the lease term in good shape without “excessive wear and tear”.
3. If you’re already in a lease and need to get out of it, you have some options
You might be able to get out of your lease early or get some cash for the lease that you’re sitting on right now that you may not be using much because of the pandemic. Dealers and individuals alike are hungry for cars and you can often sell a lease to third-party dealer or individual!
John’s Top Tip: No matter what DO NOT SIMPLY RETURN YOUR CAR TO THE DEALERSHIP RIGHT NOW! I can’t stress this enough. At the end of your lease term, people typically drop off their car at a dealership for the brand of the car and often pay a fee for the pleasure of doing so. At least request a quote from CarMax, Carvana and Vroom after finding out what your payoff is from the leasing company (remember, they may quote this to you with the sales tax included so ask for the amount without sales tax). Compare that to the offer from the other dealers. If the offer is greater than your payoff, you’re sitting on some cash.
This is true for leased cars more now than ever before as dealerships are struggling to fill their lots with new cars; they are turning to used cars to keep the lights on. The result: dealers are willing to pay more money for your used car. Leverage that situation!
The only caveat here is that some leasing companies have stopped allowing you to sell your car to any dealership that isn’t affiliated with the make of your car. That’s okay! Dealers from the same brand compete against each other constantly. Call all the dealers in your area and ask for buyout quotes.
4. You may pay less per month for the same car by leasing versus buying
Another way that leasing can help you is that you often pay less on a monthly basis to lease a car than you would to buy the same car. This can vary depending on the car, but the calculation for a lease payment works very differently than the calculation for financing a car. The short of it is that you are only paying for the depreciation of the car over the lease term instead of paying for the full value of the car.
John’s Top Tip: DO NOT PUT MONEY DOWN ON A LEASE AND DON’T DO A TRADE IN ON A LEASE! It’s a bit complicated to explain, but basically the cost of the lease is the cost of the lease no matter how much you put down. You don’t reduce the total amount that you’re paying if you put money down—you’re just making early payments on the lease.
For example, if your monthly payment is $300 over 36 months and you pay nothing out of pocket, you will end up paying $10,800 over the duration of the lease. If you put $2000 down, your monthly payment will go down to $244.44 but you will have spent $10,800 total over the 36 months. It’s the same total out of pocket over the duration of the lease, but you’re giving someone else your money to hold onto for a while!
And the worst part is that if your car gets totaled the day after you drive it off the lot, there’s absolutely no guarantee that you will see a cent of that money back. Why? Because you don’t own the car, the manufacturer does. You just rent it from them.
Trading your car in for a lease is the exact same thing as making a down payment. If you have equity in your car to the point where the leasing dealership is offering to lower your monthly payment on your new car, that means that you have equity in your old car. You should try selling it outright instead.
5. Leasing can be confusing
There are several pieces of information that you will need to know to calculate the monthly payment for the lease. Those items are
MSRP (or original manufacturer’s suggested retail price)
Selling price (MSRP minus any manufacturer’s rebates/incentives and dealer discounts)
Residual value (or the value of the car at the end of the lease term)
Money factor (this is the interest rate, but it works a bit differently)
Lease duration (months)
Local tax rates
I could explain to you how to calculate a lease, but it’s really complex and there are some good calculators out there. I recommend checking out the Leasehackr Forum’s lease calculator.
John’s Top Tip: Don’t trust the dealer. You can find the residual value and money factor for a particular car by going to the Edmunds.com forums. There, you will find the thread for the car that you’re interested in and ask for the residual value, money factor and any incentives for your zip code. These are set by the manufacturer and shared with Edmunds. The moderators will typically respond to you promptly.
6. Don’t walk onto a dealership lot unless you are test driving a car or have a rough deal hammered out via email with a salesperson at that dealership
Do all of your negotiating remotely. If you look on the LeaseHackr Forum, they have sample emails that you can send to salespeople. Some salespeople will respond well to this and others will not. Once you have the deal signed, you’ll make an appointment to go to the dealership.
If you go to the dealership to make the deal, they have you where they want you. They can use their sales tactics and waste your time by making you sit in that uncomfortable chair.
John’s Top Tip: Try to go to a dealership’s website and look for younger salespeople. Email those salespeople directly. This is a huge generalization, but younger salespeople sometimes are more willing to hammer out a deal via email.
7. Leasing has its disadvantages
I would be remiss if I didn’t let you know some of the negative aspects of leasing.
You will be penalized for any miles that you go over your mileage allowance. Penalties depend on the brand of the car but they are usually around $.25 per mile over.
You will need to have another car lined up once your lease ends or you won’t have a car to drive.
You will pay a “disposition fee” or a fee to turn in the car to the dealership if you don’t lease a new car from the same manufacturer.
Any damage to the car that exceeds wear and tear needs to be fixed before return.
Tires need to have a reasonable amount of tread left on them.
You never own the car unless you buy it out after the lease term.
John’s Top Tip: If you can find a dealership or third party to buy out your lease, you can avoid repairs and concerns about tire tread as well as the disposition fee.
8. Consider hiring a lease broker to do the hard work for you
If you want to avoid the headache of dealing with learning about leases, you aren’t alone. That’s why there are lease brokers. You pay them a fee and they find the car that you want. This adds to your expense, but there are many trusted lease brokers who will be skilled at getting you a great deal. And, even with their fee added on, they have strong relationships with dealerships which means that they can often leverage that relationship to get you a deal that matches or beats the deal that you could get on your own.
John’s Top Tip: Don’t just do an internet search for “Lease Brokers”, visit the LeaseHackr forum’s seller review forum and find a broker with good reviews. Not all brokers work in all regions, so be sure to pay attention to which broker works in your region.
Reach out to me with any questions on leasing. You can email me at jhowe@gencapmgmt.com or call me at 585-232-8560 x105.
