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Chapter 7: Get a Lease on
Leasing
With all the newspaper and TV ads
devoted to auto leasing lately, you'd think leasing was a brand-new
concept. It's not. What's new is that manufacturers and dealers
are promoting leasing more than ever before. And it's working.
Today about 30 percent of the people who drive new cars are
leasing instead of buying. That's a jump from 2.5 percent a
little more than a decade ago.
Why has leasing grown? Is it a
fad? Are people simply being influenced by well-produced ads? Or
has leasing become as good a deal as buying — or even
better? There's no easy answer. That's partly because leasing
terms and calculations are complicated and partly because
comparing buying to leasing is like comparing apples to oranges.
Which one is better depends upon individual finances,
circumstances and desires. We'll try to help you sort these out
for yourself, so you can judge if leasing makes sense for you.
What Is Leasing and Why Is It So
Popular?
Leasing is basically long-term car
rental, usually lasting two to four years. You agree to pay a
leasing company a fixed amount each month to drive the car, which
the leasing company owns, and you also pay for insurance and
routine maintenance such as oil changes. You receive a warranty,
as you would for a car you'd buy. And, as with a car you own, if
you damage a leased vehicle, you and your insurance must cover
repairs.
It's important to note that,
unlike buying a car, leasing may mean that you will always have
monthly payments. When you buy a car, the car loan is typically
paid off long before the car is worn out. In contrast, leasing
usually means endless payments. Although you may be able to buy
the car at the end of the lease, most people who lease turn in
the car at the end of the term and lease another. So the payments
continue. In the long run, leasing may be more costly than
buying, despite the lower monthly payments.
Then, you may wonder, why is
leasing so popular? There are several reasons. With the prices of
cars climbing, it has become harder and harder to afford monthly
payments that will pay off a car in three years or less. And with
new cars averaging about $20,000 today, loans are being stretched
over four to six years. By the time you truly own a car, it may
not be worth a whole lot in the marketplace. It still may be
worth a lot to you, however, if it gets you where you're going
and allows you to drive a car without making payments. That's
something to keep in mind as you learn more about leasing.
Leasing is also popular with
people who don't like driving older vehicles. They can always
drive a new car needing relatively little maintenance and fewer
repairs than most older cars. If you lease a new car every couple
of years you can always drive a fairly new car. Although you will
never escape monthly payments, the payments will be lower than
they would be if you were buying a new car every two years. This
is leasing's main attraction.
Is Leasing a Good Deal?
Does the fact that you're making
lower monthly payments when you lease mean you're getting a
better financial deal than if you'd bought the car? No — to
properly evaluate the deal, you need to look at the long-term
financial outcome and all the terms of the lease.
Who Typically Leases?
Leasing is a decision based on
personal choice, as well as personal finances. For some people,
leasing is a good idea for many reasons. For others, it's like a
spin on a race track: It offers a short-term thrill, but doesn't
get them anywhere in the long run. See whether or not you
resemble one of the following drivers.
The Drive for Success
If you're like Maria Lopez, image
is extremely important to your success. And if, like Maria,
you're just starting your career, you might not yet be able to
afford to buy the car that gives your clients the confidence that
you're a "winner." By leasing, Maria has decided she
can impress her clients by taking them out to lunch in a smooth-handling,
mid-sized car with ample passenger room. And she can make the
monthly payments required without straining her finances.
The Family That Stays Together
Becky and Harvey Gilbert are in
their late 30s and have three young children. They want a car
roomy enough to comfortably fit the family, a few friends and
various toys, bikes and camping gear for their summer vacations
in Minnesota's scenic parks.
Why are Monthly Payments Lower When You Lease?
The monthly payments may be lower
when you lease a car than when you buy it because you're mainly
paying for the car's depreciation. Depreciation is the value the
car loses over the time you drive it. If a car is worth $18,000
new, and you lease it for three years, during which time it
depreciates by $7,000, you pay $7,000 to lease the car (plus
interest and other fees listed on your leasing contract).
If you were to buy the car, your
monthly payments would have to be higher to pay off the full
price of the car. Loan payments to buy a car are often spread
over four to six years to bring the monthly cost down. Still, the
monthly payments may not be as low as they would be if you were
leasing.
What If I Want Out?
There is no three-day cooling-off
period when you lease, just as there isn't when you buy a car. So
carefully consider what you're signing when you sign a lease,
because you're promising to make lease payments for the full term
of the lease.
The Gilberts are trying to make ends meet on a limited income,
yet they want a car that's safe, preferably with built-in child
seats and both driver and passenger air bags. They fear having to
pull off the road with a carload of kids, so they also want a car
with a low probability for mechanical failure.
Their wants and needs add up to a
new minivan that they can't possibly afford to buy. Recently they
decided to lease a new safety-equipped minivan when the dealer
told them about the low monthly lease payments they could make.
For once, they didn't bat an eye at the price.
Living the Good Life
Bob Jacobson has never been one to
save. His income is steady, but it doesn't afford him the
lifestyle he wants. He was turned down for a loan to buy the four-wheel-drive
truck he wanted. When he found out he could lease the same truck
for less each month, he nearly jumped at the chance, but he
didn't feel right about it. By the time the lease was up, he
reasoned he'd still have to finance the truck in order to own it.
Or he'd have to keep making payments to lease another truck and
possibly come up with another downpayment, too.
Bob decided to buy a less
expensive car rather than leasing the truck he couldn't afford to
buy. After four years of making loan payments he can afford, he's
guaranteed he'll own a car and then have a few years of payment-free
driving in which to save money for the truck he really wants.
The Pride of Ownership
Jim Merriman made the final
payment on his hatchback three years ago. His wife ribs him about
driving a "beater," but in truth the car's body has
held up well. Jim also has tuned up the engine on schedule and
replaced a few parts. All in all, the money Jim saves by not
having monthly payments makes him gleefully happy every time he
sits on the sun-bleached seats.
Take a Second Look . . .
What are your reasons for
considering leasing? Did you fall in love with extra accelerating
power, smooth handling or a leather interior and "moon roof"
on a car you can't afford to buy? If so, rethink your decision to
lease. You may be
better off buying a less expensive car now and saving your money
to buy the car you really want later.
He's even started a bank account to put away the money he'd be
paying every month if he were leasing. It's growing so big he
plans to use some of his savings to fly his family to Florida in
the dead of winter, and he'll still have a sizable downpayment
left when he wants to buy a new car.
Beyond Monthly Payments
Even though leasing ads often
emphasize low monthly payments, it is critical to look beyond the
monthly payment to understand the total cost of a lease. Examine
the up-front and back-end fees included in the lease. And, if you
don't mind doing a little math, learn how the monthly fee is
tabulated to ensure you're getting a good deal. (See "Raise
Your Leasing I.Q." in this chapter.) Sometimes the low
payments that sounded so good in an ad can conceal hidden costs
that add up to a poor deal. Check your lease for these important
disclosures:
1. The car's price. Make
sure the price of the car is listed on the lease. This figure,
also called "capitalized cost," is similar to the sale
price you would pay if you were buying the car. It is important
to know the capitalized cost because it will determine how much
you will have to pay each month.
2. The trade-in value. If
you're trading in a car, make sure the amount you're receiving
for the car is shown on the lease. It should be listed separately
and subtracted from the car's price (capitalized cost), if you
have "positive trade equity." (See "Trade-ins and
Outs.")
If you have "negative trade
equity," then you owe more on your loan than you will
receive in credit for the trade-in. In this case, the amount you
still owe, minus the amount the dealer is giving you for your
trade-in, will be added to the capitalized cost and will increase
your monthly payment. The dealer will then pay off the balance on
the loan for the car you trade in.
Trade-ins and Outs
The value of your trade-in vehicle
should be shown on your lease separately from the price (capitalized
cost) of the car you are leasing. If the dealer is giving you
more for the trade-in than you still owe on the loan, then you
have "positive trade equity." In such a case, the
positive trade equity should be applied in one of the following
ways:
a. Subtracted from the capitalized
cost, and shown as such on the lease; or
b. Subtracted from the up-front
payments you're making to lease the new car; or
c. Given to you in cash; or
d. Some combination of these.
When you trade in a car, double
check that the contract shows the correct price (capitalized cost)
of the car you're leasing. If it's higher than you expected,
don't hesitate to point this out to your dealer and get the price
you had negotiated.
3. Other price reductions. Make sure any manufacturer's
rebate you were promised, any downpayment you're making and any
discount you negotiated for the car are listed on the lease and
subtracted from the car's price. Again, if they're not
specifically listed and subtracted, you may not be getting as low
a payment as you should.
Examples of Negative and Positive
Trade Equity
Owe Money on a Loan?
Do you owe money on a loan for
your trade-in vehicle? If so, you may have "negative trade
equity." You have negative equity if you owe more on your
loan than the dealer is giving you in credit for your trade-in.
$13,000.00 balance owed on loan
before trade-in
- 10,000.00 trade-in credit
from dealer
$3,000.00 total "negative
trade equity"
By trading in your old vehicle,
you won't receive a discount on your leased car, but you will
reduce the amount you owe on your loan. In this example, the $3,000
in negative equity will be added to the capitalized cost
of the car you lease. The dealer will then pay off the
outstanding loan on the trade-in.
Positive Equity
If you have no payments left to
make, or still have a few payments to make on your car but the
dealer will pay you more to buy your used vehicle than you owe,
you have "positive trade equity." The dealer should
subtract that positive trade equity from the price (capitalized
cost) of the vehicle you're leasing.
$10,000.00 trade-in credit from
dealer
- 7,000.00 balance owed on
loan before trade-in
$3,000.00 total credit toward your
leased car, or "positive trade equity"
With the trade-in, you can pay off
your loan and also get a discount toward your lease. Be sure the
positive trade equity is shown on your lease contract — and
is applied to reduce the capitalized cost.
Tip
Consider selling your vehicle
yourself rather than trading it in. That way you know exactly
what you're getting for it — and you may get more than a
dealer will give you.
Get the Credit You Deserve
See that the amount of your
positive trade equity is subtracted from the current price (capitalized
cost) of your new leased car. If the trade equity isn't
subtracted from the capitalized cost, you may not be receiving
the credit you are entitled to!
Who's Who in Leasing?
Who are the players in the leasing
game? While your dealer makes all the arrangements to lease you a
car, the dealer is a liaison between you and the leasing company
that owns the car. You make your payments to the leasing company,
not to the dealer.
Bumper-to-Bumper Fees
1. The front end. Remember
that the cost of a lease includes more than just the monthly
payments. For starters, it includes the up-front payments. One of
these, the security deposit, is usually refunded at the end of
the lease (unless there is damage to the vehicle). Others, like a
downpayment, aren't refunded.
Before you get too excited about
monthly payments of $200 on a 24-month lease, for example, check
to see whether you will have to make a significant downpayment.
If the downpayment is $2,400, that's the equivalent of paying
another $100 each month you'll be driving the car.
2. The back end. Fees
tacked on when you turn in the vehicle at the end of the lease
can add a big chunk of money to your leasing bill. Know your
driving habits before you lease, so you'll be able to predict
these back-end fees.
Charges that generally add the
most to the cost of leasing are extra mileage and excess wear and
tear, but there are a few others to watch for, too, such as a
termination fee for ending the lease early.
• Extra mileage: You
can usually drive a fixed number of miles annually (often 12,000
or 15,000) without incurring extra charges. Any more than that
may cost you between 8 and 15 cents per mile. If you're not
careful about this item, you can owe a lot at the end of the
lease: an extra 2,000 miles a year on a 3-year lease could cost
you $900. You can sometimes get this charge reduced by paying for
extra mileage up front, but you won't get a refund if you don't
drive the added miles.
• Excess wear and tear:
Damage you do to the car beyond what's expected by the leasing
company can dent your pocketbook. Many people who lease are
frustrated when they get hit with a large bill for "wear and
tear" at the end of the lease, especially if they feel the
car is in good condition. Read the lease and understand what it
says about excess wear and tear. Ask the dealer for a clear and
thorough explanation of the standards that will be used to
measure "excess" wear and tear, and write those
standards into your lease.
• Early Termination Fee:
Watch out for the termination fee, or penalty, if you decide you
want to stop leasing the vehicle before the lease term is up.
This penalty can be substantial — several thousand dollars
in some cases.
Another potential surprise is that
under many leases the early termination penalty can be triggered
if you "total" your car in an accident. Because the car
is no longer drivable, your lease is automatically "terminated,"
and you're obligated to pay off the lease. While you car
insurance should cover the cost of damages, it won't cover the
cost of paying off the lease. You'll need "gap insurance"
for that. You can purchase gap insurance when you lease your
vehicle.
Finally, be sure you understand
the details of the lease. Insist that the dealer walk you through
it slowly. Don't be fast-talked into a deal you don't fully
comprehend. Dealers currently aren't required to tell you all the
elements they use to arrive at the monthly fee, but a customer-friendly
dealer will.
If you feel pressured to sign a
contract or are unsure of what you're signing, walk away. A good
deal should still be available if you decide to return to the
dealership to buy or lease a car. So take your time. Remember, there's
no three-day cooling-off period! Once you sign the lease, you
must abide by its terms.
Leasing vs. Buying When Ownership
is the Goal
It's not always easy to figure out
if you'd be better off leasing or buying from the start if you
ultimately want to own the car. Even so, it's a good idea to try
to determine which makes the best financial sense for you.
To figure out what you'd pay for a
car at the end of the lease, ask for the "purchase option
price," or the amount you'd pay to buy your leased car at
the end of the lease. Then, add in monthly interest for financing
the purchase after the lease is up. While the purchase option
price may be negotiable, it's what dealers plan to charge based
on the estimated value of the car at the end of the lease.
Now compare leasing to financing.
First, how much of a downpayment could you make to lower your
monthly payments if you buy the car? When you decide the size of
the loan you'd need to buy the car, check loan interest rates
offered by your banks or credit union, as well as those offered
by your dealer, to make sure you're comparing leasing with the
best financing deal you can get.
Buying the Car at the End of the
Lease
When the lease period is over, you
can usually opt to buy the car. To decide if buying makes good
financial sense, revisit the purchase option price discussed
above. How does it compare with the price for a similar used car?
Sometimes the purchase option
price is actually less than you'd pay to buy a similar car from a
used-car dealer. If that's the case, consider yourself lucky.
Trucks, for example, were
unexpectedly popular in the early '90s, and many people leasing
them were able to buy them at the end of their leases for a much
lower price than the same truck bought from a used-car dealer.
If your car holds its value better
than was anticipated when you signed the lease, it's obviously
smart to buy the leased vehicle for the purchase option price. If
you don't really want to own the vehicle, but don't mind a little
work, you can sell it immediately and pocket a profit.
On the other hand, if the purchase option price is higher than
the market value of the car, buying it is not a sound financial
option. If you want to buy the car anyway, you may be able to
negotiate with your dealer to lower the price. But if the dealer
won't match the market price, walk away.
How to Get a Good Deal
You can get a good leasing deal
by taking a few simple steps:
• Choose a make and model
that traditionally holds its value. Lease payments will generally
be lower on a car that sells well after the lease is up.
• Shop around. Visit several
dealers and compare their offers. If you don't compare leases
you'll never know if you're getting the best deal possible. Also,
look beyond the monthly payment at all the other fees and terms
to be sure you're comparing "apples" to "apples."
• Negotiate the price of the
car as if you were buying it. (Refer to the tips in Chapter 5.)
It's important to note that if, during negotiations, you switch
from buying a car to leasing the car, the dealer should still
base your lease payments on the same price you negotiated for the
purchase. However, in some 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
and were promised a trade-in credit to reduce the cost of your
leased vehicle, double-check that the trade-in credit is
subtracted from the price (capitalized cost) of the car. (See
"Trade-ins and Outs" in this chapter.) The trade-in
credit, as well as any factory rebates or discounts you were
offered, should be subtracted from the price of the car you are
leasing.
• Be wary of the extras. Does
the lease include a charge of hundreds of dollars for
rustproofing on a brand-new car you only plan to drive for two or
three years? How about an expensive extended warranty? 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 won't benefit you.
• Two- and three-year leases
are standard in the industry. If you sign a
longer lease, remember that you still have to buy the car at the
end of the lease if you want to own it. Furthermore, the warranty
runs out after a few years and so does that "new-car feeling."
Turning Over Your Engine
Many people who lease like the
fact that the length of a lease is usually short, allowing them
to frequently turn in one car for another. But if you lease, plan
to keep the car for the entire length of the lease or you'll most
likely pay a substantial penalty for breaking the lease.
Because the formulas for
calculating these penalties are complex, ask your dealer to give
you a detailed example using real numbers. Ask specific
questions, such as: "What will the penalty be if I end the
lease next January?"
Leasing Glossary
Leasing terminology is confusing
and intimidating. To add to the confusion, not everyone uses the
same terminology. Take the following glossary with you when you
shop for a lease so you have the meanings of all the terms right
at your fingertips.
• Acquisition fee, or
assignment fee: An additional fee charged by the leasing
company. This fee usually ranges from $350 to $650 and is often
included in the monthly payment. Sometimes, however, you are
required to pay the fee up front.
• Adjusted capitalized
cost, or net capitalized cost: The "capitalized cost"
(car's price), minus any deductions to reduce the price of the
car. Common deductions are the downpayment, trade-in credit and
manufacturer's rebate. The adjusted capitalized cost is used to
calculate your monthly payment. It is similar to the "amount
financed" in a purchase transaction.
• Capitalized cost:
Equivalent to the price of the car, including any add-ons, extra
warranties, insurance, rustproofing, or other options that you've
agreed to pay for.
• Capitalized cost
reduction: Anything that reduces the capitalized cost before
the monthly payment is calculated. It usually includes your cash
downpayment, trade-in credit and manufacturer's rebate.
• Depreciation: The
value that a car is projected to lose over the period of time you
drive it. It's the difference between the adjusted capitalized
cost and the residual value.
• Disposition fee: A
charge by the leasing company to take the car back and fix it up
for sale after the lease is up. Not all leasing companies charge
this.
• Downpayment: An
amount you pay up front to lower your monthly payment. It should
be subtracted from the car's capitalized cost, or price, before
the monthly payment is calculated. It lowers the monthly payment.
• Early termination fee: A
penalty payment that may be added to the amount you owe if you
terminate your lease early. This could amount to several thousand
dollars.
• Excess mileage: Most leases allow for a maximum
number of miles per year. Any miles driven over the limit are
usually billed at between 8 and 15 cents a mile.
• Excess wear and tear:
Damage done to the car beyond the expected wear and tear from
driving. Excess wear and tear is usually determined by the
leasing company.
• Gap insurance: If
your leased car is stolen or totaled, your insurance will pay for
the damage or loss. It won't help you make payments still owed to
the leasing company. Gap insurance makes up the shortfall, or
gap, between the value of your car and the amount you still owe
on your lease, including a possible penalty for early termination
of the lease.
• Gross capitalized cost:
This is the capitalized cost for the leased car, plus the amount
of any "negative trade equity" that is added to the
capitalized cost.
• MSRP: Manufacturer's
Suggested Retail Price, or "sticker price."
• Money factor: A
number that dealers use to arrive at the interest charge for your
monthly payment. Unfortunately, the number looks nothing like an
interest percentage. It will be something like ".00375."
For many leases, the general rule is that 2,400 multiplied by the
money factor is the interest rate. Working this equation out, we
see that a money factor of .00375 gives us about a 9 percent
interest rate. However, not all lease companies use the same
conversion factor to convert the money factor to an interest rate.
• Monthly payment: The
monthly lease payments made over the term of the lease.
Generally, it includes your depreciation, interest and taxes.
• Net trade-in allowance:
This is the amount of credit the dealer is giving you for your
trade-in, after taking into consideration the loan balance on
your trade-in. Depending upon the amount of your loan, you will
have either "positive trade equity" or "negative
trade equity." (See "Examples of Negative and Positive
Trade Equity" earlier in this chapter.)
• Purchase option price:
What you'll pay for the car if you buy it at the end of the lease.
The purchase option price is often tied to the residual value. If
it is, then the higher the residual value, the more you'll pay to
buy the car, should you decide to do so, at the end of the lease
period.
• Rent charge: In a
lease, this is basically the total amount of interest you are
paying. It is also known as the "lease charge."
• Residual value: How
much leasing companies have estimated that the car will be worth
after your lease is up. The residual value affects the amount of
your monthly payment. Dealers have books with charts estimating
the residual value, which is usually shown as a percentage of the
sticker price (MSRP), and determined when the car is new. The
higher the residual value, the less you will pay each month to
lease your car. (See also depreciation.)
• Security deposit:
Usually the same amount as one month's payment paid up front.
You'll get it back if the car is in good condition at the end of
the lease.
What is $0 Down?
"Zero down" means that
the only up-front fees you will have to pay are the tax and
license fees. Thus, if a dealer offers a "zero down"
lease, you should not have to pay any fees up front, such as a
security deposit or downpayment.
What the Dealer Must Tell You
New federal regulations which take
effect in October 1997 require dealers to disclose more
information to consumers about the terms and costs of their lease.
Fortunately, many dealers already provide most of this
information. The information that must be disclosed beginning in
October 1997 includes: (see the definitions above if you have
questions about these terms)
Required Disclosures
1. The amount of any up-front
payments (downpayment, security deposit and first month's payment).
2. The number, amount and due
dates of your monthly payments.
3. The total amount of your
monthly payments over the course of the entire lease.
4. The cost of the license,
registration and taxes.
5. The gross capitalized cost (see
definition) for the leased car.
6. The net trade-in allowance you
are receiving for the car you trade in.
7. Any capitalized cost reduction.
8. The adjusted capitalized cost.
9. Rebates and non-cash credits.
10. The residual value.
11. A description of the insurance
provided or required under the lease.
12. The warranty terms.
13. Who is required to take care
of the car and pay for maintenance.
14. The standards for determining
wear and tear (if the leasing company sets such standards).
15. Penalties for default or late
payments.
16. Whether or not you can buy the
car at the end of the lease, and at what price (purchase option
price).
One lease term that dealers are
not required to disclose is the money factor. However, if you
decide that you want to do your own lease calculations or check
the dealer's calculations, you will need to know the money factor
applied by the dealer. If you want the information and the dealer
will not give it to you, consider taking your business elsewhere.
Final Questions
Before you sign your lease, you
should review it and ask yourself the following questions:
• Was I credited for my trade-in
vehicle?
• Was I credited for other
discounts from the car's price, such as any manufacturer's rebate
and my downpayment?
• What are my mileage
limitations?
• What is the penalty if I
default on the lease or decide to end it early?
• Do I understand what "excess"
wear and tear will mean when I turn the car in?
Raise Your Leasing I.Q.
The Nitty Gritty of Lease
Calculations
Before you sign the contract, go
over it with a fine-toothed comb — or better yet — a
calculator. Checking the numbers is a little complicated but well
worth the trouble. Everyone makes mistakes sometimes, and you'll
pay, literally, for any wrong calculations used to figure your
lease.
See the "Leasing Glossary"
in this chapter for help in understanding the terms used in the
following section. In this section, first you'll learn how to
calculate a monthly payment, then you can fill in your own
calculations. You'll also want to review the lease to make sure
you understand the up-front and back-end fees, as well as any
other terms that you agree to when you sign the lease.
Check Your Monthly Fee
The following formula will allow
you to calculate your monthly payment within a few dollars of the
actual payment. All you need is a pen, paper and probably a
standard calculator, unless you like to do your math by hand.
Warning: These calculations will
work for most leases. However, some lease companies may use a
different type of money factor and a different formula for
calculating the monthly payment.
Figure Your Lease Payment
Example: Your Lease Payment:
(fill in your numbers)
Determine the following numbers:
MSRP (sticker price) $22,000
Capitalized cost $20,000
Net trade-in allowance $2,000
Adjusted capitalized cost $18,000
Residual value $11,800
Term of lease 36 months
Money factor .00335
In this example, the sticker price
(MSRP) was $22,000, but the customer was able to negotiate a
lower leasing price ("capitalized cost") of $20,000. In
addition, the trade-in credit reduced the capitalized cost by
another $2,000 to $18,000. (Make sure that your trade-in credit
and any other discounts are included in the calculations arriving
at the adjusted capitalized cost.)
The monthly lease payment is made
up of three parts: the depreciation charge; the monthly interest,
or lease charge; and the monthly tax. It is calculated as follows:
Monthly depreciation + interest
charge + tax = Monthly payment
(If you want to know approximately
what the interest rate on your lease is, in most cases you can
multiply the "money factor" by 2400. This conversion
works for most money factors, although some lease companies may
use a different conversion factor.)
Monthly Depreciation
The total depreciation charge is
calculated by subtracting the dollar amount of the residual value
from the adjusted capitalized cost and then dividing by the
number of months in the lease. This is a measure of how much the
car's value is going down each month.
(Adjusted cap cost - residual
value)/months in lease = Monthly depreciation
Example:
($18,000 - $11,800)/36 = $172.22
Monthly Interest Charge
This is what the leasing company
charges you for using its money. It is sometimes referred to as
the "rent charge" or "lease charge." The
monthly interest charge is calculated by first adding the
adjusted capitalized cost and the residual value. Then multiply
the
result by the money factor.
(Adjusted capitalized cost +
residual value) x money factor = Monthly interest charge
Example:
($18,000 + $11,800) x .00335 = $99.83
Monthly Tax
Add the monthly depreciation and
the monthly interest charge. Then multiply the total by the
excise tax. (We use 6.5% below, as is standard in Minnesota. The
tax varies from city to city in Minnesota, however).
(Monthly depreciation + monthly
interest) x tax rate = Monthly tax
Example:
($172.22 + $93.83) x .065 = $17.29
Total Monthly Lease Payment
The total monthly lease payment
equals the monthly depreciation plus the monthly interest charge
plus the monthly tax.
Monthly depreciation + monthly
interest charge + monthly tax = Total monthly lease payment
Example:
$172.22 + $93.83 + $17.29 = $283.34
Done!
There you have it: your monthly
payment. The calculation should be within a few dollars of the
amount the dealer quoted. If it's not, insist that the dealer go
over all the costs in the monthly payment. Are there any hidden
costs? If the dealer can't explain all the costs to your
satisfaction, walk away.
Note: Another way to calculate
your monthly payment is to follow the steps on a business
calculator with a lease program. If you do this, you will
probably need to convert the money factor to an interest rate
before you do the calculations. As a reminder, the usual rule of
thumb to obtain the interest rate is to multiply the money factor
by 2400.
Leasing Form
Following is a model leasing form
prepared by the Federal Reserve Board. Dealers may use a form
very similar to this.
Model Closed-End or Net Vehicle Lease Disclosure
Federal Consumer Leasing Act
Disclosures
Date:
Lessor(s) Lessee(s)
Amount due at
Lease Signing
(Itemized below)
$ ___________
Monthly Payments
Your first monthly payment of $
______ is due on ______, followed by ______ payment on the ______
of each month. The total of your monthly payments is $ ______.
Other Charges (not part of your monthly payment)
Disposition fee $ ______
(if you do not
purchase the vehicle)
Annual tax ______
___________ ______
Total $ ______
Total of Payments
(The amount you will have paid by
the end of the lease)
$ _____________
Itemization of Amount Due at Lease Signing
Amount Due at Lease Signing:
How the Amount Due at Lease Signing will be paid:
Capitalized cost reduction $
______ Net trade-in allowance $ ______
First monthly payment ______
Rebates and noncash credits ______
Refundable security deposit ______
Amount to be paid in cash ______
Title fees ______
Registration fees ______
__________ ______
Total $ ______ Total $ ______
Your monthly payment is
determined as shown below
Gross capitalized cost. The agreed upon value of the vehicle is ($
________ ) and any items you pay for over the lease term (such as
taxes, fees, service contracts, insurance, and any outstanding
prior loan or lease balance) $ ________
If you want an itemization of this
amount, please check this box.
Capitalized cost reduction.
The amount of any rebate, cash payment, net trade-in allowance,
or noncash credit you pay that
reduces the gross capitalized cost - ________
Adjusted capitalized cost.
The amount used in calculating your base monthly payment =
________
Residual value. The value
of the vehicle at the end of the lease, used to calculate your
base monthly payment = ________
Depreciation and any amortized
amounts. The amount charged for the vehicle's decline in
value
through normal use and for other
items paid over the lease term = ________
Rent charge. The amount
charged in addition to the depreciation and any amortized amounts
+ ________
Total of base monthly payments.
The depreciation and any amortized amounts plus the rent charge =
________
Lease term. The number of
months in your lease ÷ ________
Base monthly payment. =
________
Monthly sales/use tax. +
________
________________ + ________
Total monthly payment. =
$________
Early Termination. You may
have to pay a substantial charge if you end this lease early. The
charge may be up to several thousand dollars. The actual
charge will depend on when the lease is terminated. The earlier
you end the lease, the greater this charge is likely to be.
Excessive Wear and Use. You may be charged for excessive
wear based on our standards for normal use (and for mileage in
excess of ________ miles per year at the rate of ________ per
mile).
Purchase Option at End of Lease
Term. (You have an option to purchase the vehicle at the end
of the lease term for $ ________ <with a purchase option fee
of $ ________>.) (You do not have an option to purchase the
vehicle at the end of the lease term.)
Other Important Terms. See
your lease documents for additional information on early
termination, purchase options and maintenance responsibilities,
warranties, late and default charges, insurance and any security
interests, if applicable.
(The following provisions are
the nonsegregated disclosures required under Regulation M.)
Official Fees and Taxes.
The total amount you will pay for official and license fees,
registration, title, and taxes over the term of your lease,
whether included with your monthly payments or assessed otherwise:
$ ________.
Insurance. The following
types and amounts of insurance will be acquired in connection
with this lease:
__
________ We (lessor) will provide
the insurance coverage quoted above for a total premium cost of $
________.
________ You (lessee) agree to
provide insurance coverage in the amount and types indicated
above.
Standards for Wear and Use.
The following standards are applicable for determining
unreasonable or excess wear and use of the leased vehicle:
____
Maintenance.
(You are responsible for the
following maintenance and servicing of the leased vehicle:
__________
(We are responsible for the
following maintenance and servicing of the leased vehicle:
__________________
Warranties. The leased
vehicle is subject to the following express warranties:
__________________
Early Termination and Default.
(a) You may terminated this lease before the end of the lease
term under the following conditions:
__________________
The charge for such early
termination is:
__________________
(b) We may terminate this lease
before the end of the lease term under the following conditions:
___________________
Upon such termination we shall be
entitled to the following charge(s) for:
____________________
(c) The extent these charges take
into account the value of the vehicle at the end of the lease
term, if you disagree with the value we assign to the vehicle,
you may obtain, at your own expense, from an independent third
party agreeable to both of us, a professional appraisal of the
________ value of the leased vehicle which could be realized at
sale. The appraised value shall then be used as the actual value.
Security Interest. We
reserve a security interest of the following type in the property
listed below to secure performance of your obligations under this
lease:
______________________
Late payments. The charge
for late payments is: ______________________________________
Option to Purchase Leased
Property Prior to the End of the Lease. (You have an option
to purchase the leased vehicle prior to the end of the term. The
price will be ($ ________ / <the method of determining the
price>.) (You do not have an option to purchase the leased
vehicle.)
pter 8: Words About Warranties
To warrant means to give proof, so when you get a warranty on a
car, it's to give proof that certain mechanical and body parts
are sound or will be repaired if they're not. Of course there are
time limits on this.
But a warranty allows you to be
comfortable knowing that you won't be stuck with major repair
bills soon after you buy a car. It's a nice safety feature,
especially if you're buying a used car and don't have a
mechanical bone in your body. If that's the case, have a good
technician check the car over. Even then, get a warranty if you
can.
A car typically comes with a limited
warranty, which offers less than full coverage. Read it carefully
to find out what the limits and deductible costs are.
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