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Car Leases Explained
  • I have created a video that talks about the benefits and the pitfalls to leasing a car. Take a look at it and let me know what you think. You can post your lease deal in the comments and I will take a look at it and let you know if I think it is good or not. In addition if you don't know what car to get you can post your requirements like 4 doors, good gas mileage, leather seats and I will try to help you figure out what car is best for your needs.

    I shot the still images with the GH3 at our local auto show. I also recorded the audio with the GH3's internal mic. There were a few pop's with the "P"s so I need to invest in a better external mic.

    Here is the text from the video. And the links that go with it.

    Lease Calculator

    Edmund's Forums for finding out how much a car should cost.

    One of the biggest purchases you will ever make is buying a new car. It is important that you fully understand how much you are actually paying when you purchase or lease a vehicle. It is very easy for a salesperson to hide extra fees or additional charges.

    I often get asked if it is better to lease or buy a car. It really just depends on how long you intend to keep the car and how many miles you will drive it each year. If you know that you are going to keep the car for 5 or more years then buying will almost always end up costing you less than leasing.

    If you know that you can’t resist the urge to get a new car every 3 years and you drive 15,000 miles per year or less then leasing might be an option.

    I lease all of my cars because I have a 12 mile commute to work each day. I only do 12,000 miles a year and I am a sucker for a new car when the latest models are released. I am willing to pay a little extra to have the latest and greatest new car.

    However, I don’t let myself get carried away. I make sure that I negotiate the best lease I possibly can. If the dealer doesn’t want to negotiate or if they try to throw in extra fees I simply walk out and go to the next dealer.

    There are several key items to negotiating a lease.

    First you need to know what all of the factors are in calculating a leases monthly payment. The first factor is the MSRP of the vehicle. This is the MSRP plus any destination charge listed on the window sticker of the car. The destination charge is usually not negotiable because it is set by the manufacturer and not the dealer.

    The second factor is the actual selling price of the vehicle. With leases you absolutely must negotiate the selling price of the vehicle down below the MSRP in order to get a good deal. Almost all cars can be negotiated below MSRP and most can even be negotiated below the invoice price.

    Dealers get factory incentives and rebates that can allow them to still make a profit even when they sell a car below their actual invoice amount. Make sure you are always aware of what incentives and rebates are available on the car before you start negotiating.

    I always go to the forums and look at their Prices Paid and Lease Questions posts for the vehicle I want. These forum posts will tell you what the going price is for the vehicle you want. I have links to these forums in the description of this video.

    Don’t always take everyone’s word on those forums as gospel. Some people post that they got $5000 off on a brand new super popular model. They could easily be lying about their deal or they could have gotten ripped off on their trade-in even though the car they were buying was heavily discounted.

    In addition don’t let the dealer temp you into putting money down on a lease. Every single dime you pay upfront will disappear forever if your car is stolen or totaled. The insurance company just pays off the lease if your car is a total loss. You don’t get the money you paid up front back with a lease like you can if you are buying the car. You are much better off trying to get a really low interest rate and rolling everything into the lease than putting money down.

    The single easiest way for a dealer to rip someone off on a lease is for them to jack up the money factor. The money factor is just a term that car dealers came up with instead of calling it an interest rate.

    Unfortunately, our government sided with the dealers and said that leased vehicles are exempt from the Truth in Lending laws in that the dealers do not have to disclose the money factor to you because they don’t refer to it as an interest rate.

    This is an awful exemption to the law and it should be changed. It allows the dealers to commit outright fraud against customers who simply don’t know any better. The key is to learn what this money factor means and what a good value for it is.

    The financial institution or Bank that is backing the lease sets two values in the monthly payment calculation. The first value they set is the buy rate or minimum money factor value. This value was intentionally created as a very small decimal value to try to make the consumers think it is not important.

    The most common money factor value I have seen is .00162 which equates to an interest rate of 3.89%. You can get the interest rate by multiplying the money factor by 2400. 3.89% really isn’t that great of an interest rate. Reducing the money factor by as little as .0002 could equate to saving 1% off of the price of the vehicle. On a $40,000 car that would mean saving $400.

    The second term the financial institution or bank sets is the residual of the car. The residual is simply a guess at the value of the car at the end of the lease and it is expressed as a percentage of the MSRP and not the final selling price of the vehicle. You want the residual to be as high as possible.

    The highest residual I have ever seen for a 36 month lease with 12 thousand miles per year is on the Mercedes Benz CLA. It is at 66% right now. That is amazingly high and it means that you are paying thousands less on a lease than you would if the car had a more typical 55%-60% residual even if the cars are the same price.

    The important thing to remember about the residual is that if the residual is very high you need to plan on turning the car in to the dealer at the end of the lease. Cars with very high residuals will always be worth less than their residual at the end of the lease. You do not want to buy these cars at the end of the lease.

    Leasing is really a gamble. You are betting that the bank has overvalued their car and they are betting that they have undervalued their car. That and they are counting on the fact that the dealer can manipulate the numbers to make it look like you are getting a good deal even when it is not a good deal.

    You really need to negotiate the money factor and the selling price of the car. If you only negotiate the selling price then the dealer will almost always increase the money factor by the same amount that they decreased the selling price of the car. They make you think they are discounting the car when they actually are not.

    Your best bet is to know what the buy rate is for the money factor and ask for that first thing. Get it in writing if you can. They are not required by law to tell you a money factor. However, if they agree to a money factor in writing they cannot change it. Get them to nail down that money factor first and then start negotiating the price of the car.

    Remember most dealers cannot increase the price of the car above the MSRP. However, they can set the money factor to whatever value they want. A dealer tried to charge my .00262 for the money factor which is almost 6.3%. That is a ridiculous interest rate.

    If you get the money factor nailed down to the buy rate and they discount the car they can still make the lease really bad by throwing in extra fees. Some of these fees are legitimate fees. However, most of them are just ways that they add in extra profit for themselves.

    Almost every lease will have an acquisition fee and a doc fee. These fees may or may not be negotiable. It really just depends on the dealer. A typical value for the lease acquisition fee is about $800. The doc fees are usually around $400. If you can negotiate these down then great. If not then it is still ok as long as the money factor and selling price are low enough.

    Once you have a Money factor, MSRP, Selling Price, Residual, and you determine how long the lease is and how many miles you can figure out a monthly payment. has a really handy calculator that will take these figures and tell you what the monthly payment will be.

    Don’t fall into the trap of allowing the dealer to do the calculation for you. You need to do this calculation yourself. The dealers will almost always play with the numbers when they do the calculation. If their numbers don’t equal your numbers then walk away. They are most likely trying to steal money straight out of your wallet if the numbers don’t match.

    If they try to tell you that you are doing the calculation wrong then give me the numbers in the comments below and I will tell you if they are lying or not.

    The last and probably most complicated component of the lease are the taxes. The problem is that each state is different. Some states like Texas, Virginia, and Illinois all charge the tax based on the total price of the vehicle even though you are only paying for a portion of the vehicle.

    If you live in any of the states that charge tax on leases like that then you will probably find that a lease is not a good option. Taxes in those states are usually $1000 or more higher than taxes in states that don’t charge the taxes on the entire value of the car.

    Also remember that the taxes are determined by the state the car is registered in. If you buy a car in Texas but immediately take it to another state to register it they should charge you the taxes based on the state you register it in.

    I am not a lawyer so I can’t tell you exactly what the tax laws are for your state. However, if you post a question in the comments about the taxes for your state I will try to help you locate the information about your local taxes.

    Once you have all of those pieces of information you can determine the actual monthly payment for the car. A typical monthly payment for a $40,000 vehicle with 12,000 miles per year for 36 months might be a little less than $500 a month plus taxes with no money down and all of the fees rolled into the lease and a 2% discount on the car.

    There are other things that can help make the leases more attractive like Multiple Security Deposits. However, those are not always offered so I won’t go into details about those right now.