In my last installment, I talked about how our collective anger towards the car-buying industry may be directed towards the wrong people. This time I am going to discuss an often neglected and somewhat confusing topic...leasing. I know, I know…. leasing is for suckers: you get whacked with mileage overages, you never own the car, you get stuck into a perpetual trap of car-payments...But as a consultant I try my best to avoid positions of “all X is good” and “all Y is bad.” You see, for some folks leasing is a good option (and even if leasing is not for you fellow gearhead, stay with me and learn something because you know your friends come to you for car advice).
Who are leases good for? First off, leases really only work for people who drive within 10-15k miles a year. If you drive more than that, then leasing is not for you; the last thing you want is to be paying upwards of 30 cents per mile with overages. Leases are also good for you folks lucky enough to have a job that gives them a company car. Or maybe you have a limited budget and don’t want to take the chance on a used car. Then there are some of you that really want to drive a luxury car, but don’t have the cash. And then there are the folks that just can’t commit to a long-term relationship with one car.
How do leases work? There a complicated and often convoluted equation that determines what the lease payments will be. What it basically comes down to is this: You start with the sale price of a car say an MSRP of $42,000. Then an automaker projects what a car is worth given the time and mileage driven, this is called the “residual value.” If a car is driven for 3 years at 12 thousand miles a year the “residual value” of that car may be 65%, so the $42,000 car will be worth $27,300 at the end of the lease. When you lease you, for the most part, are just paying the difference between the sale price and the end residual value; there are some other fees and charges worked in as well, but this is the bulk of your payment.
Now let’s clear up some myths about leasing:
Myth 1- Leasing is always cheaper than buying. This is mostly true, while your monthly payment may lower than if you purchased the car depending on the model the value proposition might not be there. For example, some time ago I considered leasing a Sonic LTZ, the lease on a 19k car came back at close to 325/mo. Given the same down payment, I could have bought the car for $30 more a month.
Myth 2- You don’t negotiate purchase price with a lease. False, some dealerships will try to tell you that leasing is different and hide behind the manufacturer lease incentives. The reality is that car is being sold, it is just being sold to the lease company and not you. Remember you want to close the difference between the residual value and the sale price as much as possible. If the dealership sells the car for less, the lower your payments will be. I recently brokered a deal for a client who had to order their car because what they wanted was no longer available. You would think because a car is being ordered the monthly lease payments should be the same from dealer to dealer. One dealer sent me a lease payment quote that was $30/mo cheaper. That is $1440 dollars over the course of a 48/mo lease. So make sure you shop around!
Myth 3- Cars of similar price should have similar lease. Nope, it again really depends on the dealer, the manufacturer, and the projected residual value of that particular model. If cars A and B both have a sale price of 42,000 but car A has a residual value of 55% and car B has a residual value of 65% the lease payments are going to be lower on car B.
Myth 4- All those killer lease deals on luxury cars advertised are easy to come by. Not so fast, often luxury car makers will have lease incentives on models of a lower trim with minimal equipment and/or pair these incentives with very high down-payments. Very few dealerships will stock vehicles like the “specials” advertised. To avoid the hassle do two things; first, read the fine print on the manufacturer’s website so you know exactly what is being offered and two, contact the dealerships in your area to see what they have in their inventory. If you are determined to get that low lease deal and what you want is not available, it is often possible to order your car the way you want it.
Just like with anything else, it pays to do your research and shop around, but when you do make sure you are comparing apples-to-apples. When gathering quotes, have a set down payment and know the lease term and mileage you want. However, if you want to save money try to be flexible, as each automaker has their “sweet spot” when it comes to lease incentives. So instead of leasing a car for 36 months, reducing that term to 27 or extending it to 48 may save you hundreds or thousands over the course of that lease.
Thanks for reading.
My name is Tom and I run AutomatchConsulting.com. I am a professional car-buying consultant, which means people pay me to help them select the right car (NO YOU CAN’T HAVE A PRIUS) and negotiate with the dealerships to get them the best price. If you have any other questions or suggestions for future posts about the car-buying process please let me know. You can find some of my other posts on car-buying here.