Leasing A Car
Instead of buying a new or used car, another option is to lease a new car for monthly payments. A lease is a contract in which a new car is loaned to you for a specified time period, ranging from six months to five years. If you want to have a new car every few years, then leasing might be the way to go; however, it may cost more than purchasing a car in the long run.
Vehicles can be leased from a dealership. To determine if the lease you are considering is right for you ask the dealer these questions:
What is the car's residual value? The residual value is an estimate of how much the vehicle will be worth at the end of a lease. It is a key component of a good lease and is usually expressed as a percentage of the vehicle's manufacturer's suggested retail price (MSRP).
What is the money factor? A "money factor" is lease jargon for what most people think of as an interest rate. Money factors usually look something like this: 0.00125. Just as with a traditional interest rate, the lower the number the better. To convert the money factor back into an interest rate, multiply it by 2,400. So if the money factor is 0.00125, multiply it by 2,400, and you'll see that it's 3 percent.
How many miles does the lease include? Sometimes you'll hear about a great lease deal but then will learn (by asking or by reading the fine print) that the lease only includes 7,500 or 10,000 miles a year. Limited miles might be fine for someone who rarely drives, but most people will need a minimum of 12,000 miles a year. Some drivers will require more.
How much money is due upfront? Drive-off fees, which are your upfront out-of-pocket costs, are a combination of fees and a down payment. Ideally, you want to pay as little as possible upfront. Unlike a traditional loan, initiating a lease with a big chunk of cash may not save you much money in the long run. In fact, putting down a hefty chunk out of pocket to start a lease can actually hurt you. Should your leased vehicle be totaled or stolen, there is no guarantee that the down payment you've made will be returned to your insurance settlement.
What fees does the lease have? Fee amounts differ from brand to brand and from bank to bank. Even if some fees are non-negotiable, it is better to know what you're paying rather than being surprised at the end of the lease by a disposition charge you weren't expecting. Nearly all contracts have acquisition and disposition fees that usually can't be negotiated out, but you can often get the dealer to waive the security deposit.
What will this vehicle cost me over the life of the lease? Multiply the total amount of your potential monthly payment, including taxes and fees, by the number of months in your lease. Take that number and add in your total drive-off costs. The total is the complete amount you'll spend on the lease.
Monthly Lease Payments
After successfully negotiating a deal, signing a contract, and making a down payment, you will commit to a monthly payment that will cover the cost of the car’s depreciation.
Five important numbers determine your monthly lease payment:
1. Lease Term
How long you’ll lease the car.
2. Lease Residual Value
An assumption of what the vehicle will be worth at the end of the lease term.
3. Money Factor or Lease Fee
Similar to the interest rate paid on a loan and is also based on a customer's credit score. It is commonly depicted as a very small decimal. Multiplying the money factor by 2,400 will give the equivalent annual percentage rate.
4. Miles Driven Per Year
The average number of miles you expect to drive each year during the lease term.
5. Acquisition Fee
A fee to cover a leasing company’s administrative costs.
Be aware that leasing contracts come with many conditions. Always read your lease contract thoroughly to avoid any surprises later.
- If you decide to buy the car that you leased, the cost of the lease combined with the purchase price of the car is often much more than the price of the car when it’s new.
- Deciding you want to end a lease early means you’ll have to pay the remainder of the lease plus any termination fees.
- Any wear and tear on the car, including scratches and dings, means you’ll have to pay to fix anything that decreases the resale value of the car.
- If your mileage surpasses the limit that you agreed to, then you’ll have to pay a specified amount for each mile that is over the limit.
- Customizing the vehicle in any way will mean you have to pay an additional fee for making modifications at the end of the lease.
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