HOW CAR LEASING WORKS.
One common misconception is that car leasing is at all similar to car renting – which it most certainly is not. Car renting and car leasing are entirely different financial endeavors. Car leasing was built on the premise of only paying for what you use out of a vehicle, or in other words, paying for the vehicles depreciation for the duration that the car is in your possession. Depreciation is the quantitative amount left over when you subtract the car’s initial MSRP from the car’s predicted value at the end of the lease (which is also known as residual value). The lower the depreciation, the lower the lease payment, the better the lease deal.
Depends on car make and model
Some cars, although worth the same amount to buy upfront, lease totally differently due the difference in their depreciation. For example, two different cars can both cost $40,000 to buy, but if one of those cars is worth $20,000 after the lease is up (residual) and the other is worth $15,000 after the lease is up, the first car has a lower depreciation value ($40,000-$20,000) and will therefore lease better than the second car.
Something to keep in mind generally is that European cars usually have lower depreciation than American cars and will therefore generally lease better.
MSRP (Manufacturer’s Suggested Retail Price)
MSRP is the full price of the vehicle minus dealer fees, even though they are part of the overall cost of the vehicle. As stated in the name, the MSRP is suggested; therefore, it is totally negotiable (if you’re willing to haggle your dealer).
Tools such as TrueCar.com display what other people are paying for the vehicle you desire. Carvoy’s benefit is that it provides the same type of data, in addition to displaying the best offer on the market. It clearly displays the MSRP and how much you would be saving by using Carvoy. Best of all, it’s free.
Once a price has been agreed upon on a leased car after negotiations and haggling, this is called the capitalized cost. A good lease deal entails that the capitalized cost is less than the MSRP. A cap cost reduction, as you may guess, is how much the dealer chooses to reduce or discount the MSRP in your favor. Furthermore, putting money down upfront at signing is considered to be cap cost reduction, as it results in a lower MSRP for you (even a small amount upfront can greatly reduce your monthly payment). It goes without saying: the lower the cap cost, the lower the monthly payment
Capitalized cost reduction
Capitalized cost can be reduced by rebates, incentives, trade in credit, or cash down payments. To get the net capitalized cost, you must subtract the cap cost by the cap cost reduction, which is the negotiated price of the vehicle plus any other costs, minus any reductions.
The residual value is the wholesale value of a vehicle at the end of the lease term, also sometimes called the resale value. Again, the higher the residual value, the more the car is worth at the end of your lease, the lower your monthly payment will be. It’s important to note that residual values are estimated at the start of your lease and there is no way to know the actual residual of your vehicle before you lease it. Sometimes, car manufacturers will purposefully inflate residual values on cars that are low in demand to offer better deals (these are called subvented lease deals)
Residual values typically start as a percentage of the MSRP. Residual percentages decrease as the length of the lease increases – this is due to the fact that as a vehicle gets older, the less it’s worth. Residuals fall exponentially within the first 24 months, then more slowly in the following months. This is precisely the reason why short term leases are generally more expensive than long term leases.
Generally speaking, if your residual percentage is at least 50% of your MSRP on a 36 month lease, you should be in good hands.
The money factor can be thought of as the interest rate you pay on the vehicle but represented as a divisible percentage. Remember, when you lease you are essentially paying back the leasing company for their investment, as they had bought the car from the dealer and get paid with interest in the form of your monthly payments, as with any loan.
You can convert the money factor into the interest rate by multiplying the money factor by 2400 (this number is always the number you use, regardless of the length of your lease term). For example, if your money factor is .00423, your APR (annual interest rate) is 10.15%. This concept of the “money factor” was essentially created to throw consumers off and make them feel like the interest rate is totally negligible, when, in fact, it’s not.
It’s important to note that credit score has a direct influence on money factor. If your credit history is less than ideal, your money factor will increase or you might not be able to lease at all. Try to figure out your credit score before you make your way to the dealership.
It’s important to be a knowledgeable consumer, especially in the convoluted industry of car leasing. Keeping all these things in mind, you will never get ripped off again.
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