What would the very best guide to understanding leases look like? No one can say for sure. What I’ll try for here, at least, is a lease guide that I wished had been around for me (someone who runs far, far away from anything math-related). I promise that not a single mathematical formula will sink its evil teeth into this article.
The best place to start is to understand exactly what you are responsible for. In fact, before we take another step, let me introduce you to the term “residual value.”
Once you understand residual value, you’ll understand how you might end up with a lower monthly payment leasing a more expensive car, even though common sense might tell you otherwise.
Imagine for a moment you’re going to lease… a pie. Your residual value of that pie is how much is left to own after your lease has ended. The more pie that’s left after your lease is done, the less you’d had to consume.
Lease Guide Tip #1: Different cars have different residual values.
If one car is worth 40% after your lease, you’ll have paid for 60% of it during your lease term. If another is worth 65%, you’ll only have paid for 35% of it. These are situations where eating less pie is good.
In order for residual values to work, one has to assume that the car coming back will meet its mileage and condition requirements. If you consumed more of that pie than your agreed-upon limit by going over on miles, you’ll get a penalty because you impacted its resale value. The same goes for the condition of the car. Before leasing a car, be sure to find out:
- Whether it includes enough mileage for your needs
- The penalty for going over
- The wear and tear limitations
- Whether there’s a fee for simply turning it in (a “disposition fee”)
Different people will still have different payments because of two additional elements: The price of the car and the money factor.
Lease Guide Tip #2: Know The Price of the Car
Lease contracts and terms are tricky because they don’t simply say “Selling Price.” In leases, the selling price is the known as the “Cap Cost.” If you put money down or have paid a bank fee (also called an “acquisition fee”), what’s left is called the “Adjusted Cap Cost.”
When you’re asking for a vehicle price quote on a lease, what you’re really asking is its initial cap cost. The lower the cap cost (or your adjusted cap cost), the lower your monthly payment. I’ve heard people say that putting money down on leases is throwing money away. You aren’t throwing it away – it lowers your adjusted cap cost, which lowers your payment. Remember, you’re responsible for the same percentage of the pie, regardless whether you pay for this percentage in payments or with some money down and payments to follow. You’ll save a little more when you put more down, because you aren’t paying interest (AKA the money factor). With any lease, you should put down the amount that works for you.
Lease Guide Tip #3: Know The Money Factor
Getting selling prices (or if you’re in my shoes, giving them) is fairly easy. But what many customers don’t think to ask about is the lease rate (“money factor”). This may be because many people don’t know what to make of a number like “.000128.” And since I promised you no formulas, I won’t go into it too much. Besides, honestly, if you understand all the basic components of a lease, you’ll know that a lower monthly payment depends on all of them – not just the money factor. Asking about the money factor is a good idea, though. Not only to verify that you’re receiving competitive rates, but also to check that it’s reflected accurately on the lease agreement you sign at the dealership.
Getting the Best Lease Deal
As the Internet Manager at a car dealership, I get lots of emails and phone calls from customers with one simple question: What’s your lowest price? I cringe when I think how much they leave themselves exposed to unscrupulous salesmen who actually prefer this question for the opportunity it affords. They can win the appointment by providing the lowest price, and then play games with an actual lease calculation. I can’t blame customers, really. With so many sites online promising “get the lowest price,” it’s as if they’re conditioning shoppers to only ask only this one question and to naturally assume the lowest price must be the best complete offer.
If you haven’t had a chance to read my article on the difference between a price quote and an offer, I recommend you do. And don’t forget: when you’re thinking of leasing, it’s more important than ever to get the best complete offers.