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.
3. Residual-value
runaround
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
talk
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
ploy
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
due.
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
confusion
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 6%.
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
elsewhere.
