CONTENTS 1.
How To Spot A Good Car Lease
1
2.
Independent Car Lease Companies
4
3.
Lease Financing
6
4.
Lease Trading
8
5.
Leasing And Credit Score
10
6.
Leasing Glossary
12
7.
Leasing Used Cars
15
8.
Leasing With Bad Credit
17
9.
Luxury And Reused Cars Values
19
10.
Single Lease Payment
21
11.
The Residual Value Of Leasing
23
12.
Using Lease Calculators
25
1
HOW TO SPOT A GOOD CAR LEASE
L
EASING HAS BEEN LAUDED AS YOUR CHEAPEST TICKET TO KEEP UP WITH THE
industry’s hottest vehicles and trends. However, the jury is still out on leasing. With the industry long on hype and short on detail, it is difficult to distinguish between a genuinely good deal and a downright up-selling exercise. So how do you spot a good deal? First, you need to find out if there are any down payments on the lease. 1
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AUTO LEASING GUIDE
A down payment refers to the lump sum amount that you pay upfront. Either in cash, non-cash credit or trading allowance, to reduce your monthly payment. You should think twice before putting money down on a lease: not only are you getting a rough deal, as you are essentially forfeiting the general rule of leasing. Not putting any cash upfront but the money is not recoupable at the end of your lease. There is another big disadvantage. In the event of your car getting damaged or stolen, you insurance and the gap cost will not cover the loss. 1. Mileage Limit Most leasing companies allow you a limit of 45,000 free miles over the length of a 3-year lease. This may seem like a good deal at first sight. But when you consider it only comes to 15,000 miles over a 12 month period, it is not difficult to foresee why it might be difficult to stay within this limit. Even people working from home have little trouble putting 15,000 miles on their cars. If you exceed the mileage limit, the penalty for each excess mile can be as high as 20 cents. This can add up quickly over the length of your lease. An additional 4,000 miles a year over the length of a 3-years lease contract, will end up costing you an extra $2,400 in excess mileage charges! Be realistic about your mileage needs, especially if you have to regularly commute over longdistances before you sign the contract. Consider padding the miles that you expect to use since it is less expensive to contract for the extra before you sign than it is to pay the extra charges at end of your lease. 2. Sales Tax Sales tax is usually capitalized and added to the monthly payments. However, some dealers choose not to include it in their calculations to drive the advertised lease payments even lower. What they do instead is state in the small print that the monthly payment excludes sales tax.
How To Spot A Good Car Lease?
3
Make sure you carefully read the fine print for any extra, hidden costs not included in the advertised monthly payment. Unscrupulous fees that typically slip through the cracks include sales tax, registration and title fees.
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2 INDEPENDENT CAR LEASE COMPANIES
T
O LEASE, YOU HAVE 2 POSSIBLE CHOICES.
Either you lease through a dealer’s finance source. Or independent lease company. A conventional dealer has a captive finance source, which can be the car manufacturer’s financial company. Such as BMW Financial Services, Honda Motor Credit, General Motors Acceptance Corporation (GMAC) or a major national bank such as Chase Manhattan. Independent lease companies are no financial obligation to any manufacturer financing source, but work with dealers anywhere in the country. 4
Independent Car Lease Companies
5
So which one is better? Conventional dealers provide better lease-deals on limited-time promotions. Factory-subsidized cars with subvented money factors and residuals are very attractive lease deals and can be very hard to beat anywhere else. Independent lease companies can offer you unbiased and professional advice on vehicle selection regardless of make and model. This is because they are not tied to a single manufacturer or financing source, unlike conventional dealers who have to sell specific models. They can also be more flexible regarding negotiating lease terms like residual value and mileage. Ultimately, if you prefer a more personal and customer-oriented relationship with your leasing agent, then you will do well with an independent leasing company.
3
LEASE FINANCING
F
OR AUTO-CONSUMERS, CRUNCHING THE NUMBERS IS THE MOST DIFFICULT AND
confusing aspects of leasing. Take the finance charge on a lease for instance, Most people just don’t understand how this is calculated on capitalised cost AND residual value instead of just the capitalised cost. For most, it seems plainly obvious, just as is the case when purchasing, that a charge should be levied on the capitalized cost of the vehicle. 6
Lease Financing
7
Well, no quite! When you lease a car, you are only using the car over a specified period of time with the option of buying the car. The residual value represents the loan balance at the end of the lease. If you add it to the capitalized cost and divide by two, you will get the average capitalized cost outstanding over the lease term. Let us suppose you are leasing a car with a capitalized cost of $25,000 and a residual value of $15,000. You average balance over the lease term, irrespective of how long it is, is $20,000 - the sum of the two divided by two. Using this sum works because the money factor is the annual interest rate divided by 24, rather than 12. Continuing with our example and assuming an interest rate of 6% APR $30,000 X (6 per cent 24) = $75. (Capitalized cost + residual value) X (interest rate 24) = Monthly finance charge This finance charge is added to the depreciation charge to calculate the monthly payments on your lease.
4
LEASE TRADING
E
VER WANTED TO TERMINATE YOUR LEASE EARLY, COMFORTABLE WITH
THINKING you were not going to be hit with hefty fees? You can if you transfer your lease to someone else. 8
Lease Trading
9
Trading a lease is the best option for people who want to terminate a lease early and don’t want to pay the large termination imposed by most lease agents. It can also be an alternative to get out of a lease for far less than you would otherwise pay your original lease company for extra mileage and wear-and-tear charges that can run into the thousands of dollars. For a small fee, you can advertise your car lease for assumption to a large number of potential buyers on the look-out for leases on the Internet. Such services include LeaseTrader.com, the originator of online lease-trading and the biggest online marketplace where most lease transfers take place and smaller marketplaces such as Break A Lead and Trade A Lease. Before swapping your lease, make sure your leasing company approves lease transfer transactions. Caution must be exercised in choosing a lease swapping service: make sure they facilitate the whole lease transfer process, offer online or telephone customer-service help and registered buyers undergo stringent credit checks.
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5
LEASING AND CREDIT SCORE
Y
OUR CREDIT SCORE IS PART OF THE LEASING DECISION.
When you apply for a lease, your lease company will typically look at your credit score to decide whether you to approve the application. The leasing contract stipulates that you make regular, monthly payments over your lease term. 10
Leasing And Credit Score
11
The credit score you lease company requests identifies how likely you are to make such payments. It is simply a number calculated according to a model that takes into account your payment history, any amounts you owe and credit currently in use. It is very important to keep a good credit-score, usually above 700, to qualify for a lease or any other lending decision. Start by ordering your credit report from Fair Isaac Corp, the company that creates your credit score. If erroneous data is held about you, then contact the creditor responsible and get such information corrected. Your payment history is the single most important factor in determining your credit score, so get in the habit of paying everything you owe on time and keep the balances low in your credit cards.
6
LEASING GLOSSARY
T
O GET A GOOD LEASING DEAL, YOU NEED TO UNDERSTAND LEASING JARGON.
Read through this leasing glossary to get an overview of the basics: 1. Acquisition Fee A fee charged by a leasing company to begin a lease. Not all leasing companies charge an acquisition fee but if charge it starts at about $300 and is seldom negotiable. 12
Leasing Glossary
13
2. Capitalized Cost The total selling price of the leased vehicle. This also accounts for taxes, title, license fees, acquisition fee and any optional insurance and warranty items you elect to fold into the lease and pay overtime rather than upfront. 3. Depreciation Fee Forms part of the monthly lease payment charge and accounts for the loss in the value of the car at the end of the lease. The vehicle’s list price minus the expected residual value at lease end is divided by the number of months in the lease to give the depreciation fee. Suppose you decide to lease a vehicle with a retail price of $23,500. The leasing company estimates that after a 3 year lease, the vehicle will be worth 35% of its original retail value, or $8,225. The difference, $15,275, divided by the number of months in the lease, 36 months, gives us the depreciation fee ($424) 4. GAP insurance Pays off the lease balanced if the vehicle is wrecked, stolen or totalled. Inception fees any fees that are due at the beginning of a lease. These typically include a security deposit, acquisition fee, first monthly payment, taxes and title fees. 5. Mileage Allowance The maximum number of miles a leased vehicle can be driven a year without incurring an excess mileage penalty. A typical mileage allowance is 12,000 to 15,000 miles a year, although this is negotiable with your leasing company. Mileage charges a penalty that you incur if you exceed your mileage allowance on a leased vehicle. Typical mileage charges are 10 to 20 cents per excess mile.
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AUTO LEASING GUIDE
6. Money Factor A fractional number, such as 0.00043, used in calculating your monthly lease payments. You can get a rough estimate of the annual percentage rate on your lease by multiplying the money factor by 2,400. If a dealer quotes a money factor such as 3.4 than you can get the equivalent APR, 8.16, if you multiply by 2.4. 7. Residual Value Residual value is the amount of money the leasing company says your leased vehicle will be worth when your lease ends. Higher residual values lead to lower monthly payments but higher lease-end purchase cost if you decide to keep the vehicle. 8. Security Deposits An up-front amount that your leasing company required at the beginning of a lease to safeguard against non-payment. This is generally refundable at the end of your lease. 9. Termination Or Disposition Fee The amount you have to pay the leasing company at the end of your lease if you decide not to purchase the vehicle. 10. Wear-And-Tear Charges Extra charges you have to pay at the end of your lease for any wear and use the leasing company considers above normal.
7
LEASING USED CARS
L
EASING A USED VEHICLE CAN BE AN ATTRACTIVE DEAL IN MANY WAYS.
No least getting you into that luxury model or SUV, for lower monthly payments than a brand new one. Be prepared, however, to do some more homework to dissect a good deal. 15
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AUTO LEASING GUIDE
As with new car-leasing, your price research should focus on the key figures that are the initial market value and the estimated residual value of the used car. This is harder to predict since there is no factory-set sticker price on used cars, and the residual percentage is very much pegged to a subjective current retail value. Use different sources to get a rough idea of the value of the used car: your local dealerships, internet car-evaluating tools, such as Edmunds and Cars to name but a few. Another way to pin down a good estimate is to compare the lease on your given car to a lease on a new-car with the same make and model. This should give you a better picture of the difference between leasing new and going for used. Just like leasing a new car, used vehicle leasing is more attractive when residual values depreciate the least. You stand a better chance of finding a bargain in the high-end, luxury vehicles that keep their values better as used cars. Next, you need to check the initial mileage and the overall vehicle condition. The maximum mileage on a used car should be no more than 12,000 miles a year. A 3-years old car with 50,000 miles on the clock is very unlikely to make a good used-vehicle lease. Check for signs of excessive use, like worn seat fabric, worn pedal pads and dirty engine, which might indicate that the odometer has been rolled back. If the car is not certified, you need to get it thoroughly inspected. Ask your dealer for a manufacturer-sponsored certification program or have your car certified by a qualified mechanic or inspection service. Most used-car deals don’t come with gap coverage. This is a special type of coverage, normally offered on a new auto-lease, to cover the consumer if the leased vehicle is lost, stolen or damaged. Typically, auto-insurance policies cover only what your car is worth at the time of loss, not what you still owe on the lease. The difference could run into thousands of dollars. For peace of mind, do not enter into any used-car lease without gap-coverage. Arrange it separately with either the lease dealer or your auto-insurance company.
8
LEASING WITH BAD CREDIT
H
AVE YOU BEEN REFUSED A CAR LEASE?
If so, chances are you have less flawed credit history and need to know what is involved and what you can do to build good credit history. Credit score is a measure of your credit worthiness used by leasing agents to determine whether you are eligible for a lease. You credit score is based on your past and present credit history and can range anywhere from 350 to 850. A measure above 720 is considered a prime score and will land you the best rates. If you are below 640, then you are sub-prime and will be considered bad rating by the bulk of leasing agents. 17
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AUTO LEASING GUIDE
This is where all the trouble in getting that lease comes from. Ask for your FICO Credit Score from the Fair Isaac Corporation (FICO) which details your credit score held by all three leading credit score agencies in the country. Compare the 3 credit scores and determine if any agency is holding erroneous credit data about you. Contact the reporting agency and getting corrected. If there are no mistakes in your credit report, then you can take some steps to maximise your score to go above the threshold of 640. Pay your bills on time and pay down any credit card debts you have. Do not take any new accounts as this might increase the likelihood of you getting into bad credit thus worsening your credit score.
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9 LUXURY AND REUSED CARS VALUES
W
HEN IT COMES TO LUXURY VEHICLE LEASING, THERE IS NO DOUBT THAT THE
best deals are those cars that hold their value. With this in mind, we single out a few truths about residual values that consistently apply to high-end leasing. The most determining factor when it comes to resale values is public perception of the brand, not its reliability ratings in quality surveys. 19
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AUTO LEASING GUIDE
Take the Jaguar for example: it is consistently rated as a quality car. But because of questionable reliability perception among the public, it takes a sharp dip in value at the end of its lease-term. Higher-tech options and other cutting-edge features do not necessarily mean the car will fare better. By the time your car is 2 years old, better and cheaper systems will render the laser-guided cruise control, navigation systems and built-in cell phone obsolete. Look for functional features such as automatic transmissions, power windows and wheeldrive to enhance the vehicle’s value in the used-car market. Used-car buyers view less favorably luxury vehicles that come with big incentives. These are perceived as questionable in quality and reliability.
10
SINGLE LEASE PAYMENT
A
PREPAID LEASE IS A NEW TYPE OF LEASE MAKING ITS FORAY INTO THE MARKET
in recent times. In this lease, consumers forego the cycle of lease payments if they make a large payment at the beginning of the lease. There are 2 amounts in a conventional lease that incur charges and determine your monthly lease payments. First, there is a depreciation charge which accounts for the value the car loses during the lease term. Second is a residual amount which is the projected value of the vehicle at the end of the lease. The sum of both charges gives the monthly payments on your lease. 21
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AUTO LEASING GUIDE
The idea behind a pre-paid lease is to eliminate the finance charges for depreciation and only account for residual value charges in a single, pre-paid payment at the beginning of the lease. Single-payment leases are devised with spendthrifts in mind: no cycle of monthly payments, a new car every 2 to 3 years and no interest in purchasing the vehicle at the end of the lease. You should only consider this type of lease if you are concerned about not being able to make monthly payments and have a lot of cash up front.
11
THE RESIDUAL VALUE OF LEASING
I
F YOU ARE IN THE MARKET TO LEASE A VEHICLE, YOU WILL HEAR RESIDUAL VALUE
frequently. A residual value does not only affect your monthly payments, but is equally used by leasing companies to determine any penalties. That is should you break your lease early and how much to pay if you decided to buy the vehicle at the end of your lease. Let us first start by looking at the meaning of residual value. 23
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AUTO LEASING GUIDE
The term residual value refers to the value of something after it has been used for some time. In leasing lingo, it refers to the depreciation of the vehicle’s value over the life of its lease. So how does it exactly affect your monthly payments? When you lease a car, you pay for the car’s value that you use over the lease length. Suppose you leased an $18,000 car for 2 years: the leasing company needs to estimate the value of this car in 2 years’ time. This is to know how much of the car you will be using during your lease term. That is where the residual value comes into the equation. If the residual value is estimated to be $13,000 at the end of your lease, then your monthly payments will be calculated on the $5K you will use over 24 months. This gives an average monthly payment of $208.3 plus interest, tax and fees. How about if the car is expected to lose half its value over the same period? In this scenario, you will be using $9,000 over the same period, leaving you with a higher monthly payment of $375 (plus interest, tax and fees. As you can see, residual values are a key factor in determining how much money to pay on your lease and the higher the residual value, the lower your monthly fees. This works in reverse if you build a bond with your car and decide to purchase it at the end of your lease. If we stick with the same example above, the lower monthly payments in the second scenario comeat the cost of paying substantially more to buy your car at the end of the lease. So, since the residual value is so important, how do I know which one is best for me? Well, it all depends whether you want to purchase the car at the end of your lease. If you don’t want to make a large down payment and you want low monthly payments, then a car that holds with a higher residual value is a good deal. If you are thinking of purchasing the car at lease-end, then you need to balance low-monthly payments with a moderate residual value.
12
USING LEASE CALCULATORS
W
ANT TO CALCULATE YOUR MONTHLY LEASE PAYMENT?
Consider using a lease calculator If you are considering a car lease, then you might want to know some key figures involved in the deal. 25
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AUTO LEASING GUIDE
As in the monthly lease payments, the overall cost of the lease and how much savings can be made compared to purchasing the vehicle. A lease calculator relieves you from the stress of having to know the complex underlying lease formulae used in calculations. You simply plug a number of figures into the calculator and hey presto! You get a detailed rundown of detailed payments, taxes and total lease costs. Figures you need to get from your dealer about a specific lease you are interested in include: capitalized cost, estimated residual value at the end of the lease, the number of months in your lease and the money factor. Make assumptions and change some of the figures to see how it affects your lease payments. For instance, residual value is an estimated value of what the vehicle will be worth at the end of the lease. You can input different estimates to cover different scenarios and assumptions. As a final note of caution, bear in mind that lease calculators only do calculations and check the accuracy of abstract mathematical formulae. They do not tell you whether a lease is good or bad.
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