Fees involved in leasing Mention auto-leasing and most people will automatically assume a low- monthly payment. There is actually more than what meets the eye, and a number of fees are involved at various stages of the lease process. At the beginning of the lease, you have to pay a refundable security deposit, typically equivalent to one monthly payment, to safeguard against non-payment and any incidental damage done to the car at the end of the lease. You are also required to pay an administrative charge, called acquisition fee. Other fees include licenses, registration, title and any state or local taxes. During your lease, and you expected to honour your monthly payment obligations. Any failure to do so will result in late-payment charges. You have to pay any traffic tickets, emission and safety inspections and ongoing maintenance costs. Ending your lease early will result in substantial early termination charges. At the end of the lease, expect to pay any excess mileage costs, charged at 10 to 20 p a mile. Any incidental damage done to the car, and deemed to be above normal, will result in excess tear-and-wear charges. Finally, if you choose not to purchase the vehicle, then you have to pay a disposition fee. The residual value of leasing If you are in the market to lease a vehicle, you will hear the term "residual value" recur like a leitmotif. A residual value does not only affect your monthly payments, but is equally used by leasing companies to determine any penalties 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. 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 two years time in order to know how much of the car you will be using during your lease term. That's 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 $5,000 you will use over 24 months, giving 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 come at 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. Auto Insurance and Leasing When leasing a car, it's easier to stick with the same company for your auto insurance. What you don't know, however, is that you may end up paying too much for your coverage and it's better to look elsewhere for lower rates. When you lease, the vehicle that you will drive belongs to the leasing company. They want to make sure that their investment is covered in the event the vehicle gets damaged, totalled or stolen. They typically want to get covered for the difference between what your auto-insurer pays and your outstanding leasing obligations at the time of the accident or damage. This is called GAP, short for Guaranteed Auto Protection, and is usually included in the leasing contract. If your leasing company is called BMW Financial Services, Chrysler Financial or any other finance division of an automaker, then chances are your GAP insurance will be offered by the same lease company. You are under no obligation to accept GAP insurance included as part of your lease agreement. Why pay an insurance premium if you could get the same coverage for a lower price? Invest some time shopping by comparing quotes from other insurance companies, including your existing one. Ask for discounts that you already qualify for and adjust your coverage accordingly. Buy a car at the end of your lease You've come to the end of your lease and you like you car enough you want to keep it in the driveway. Just like buying a used car, there is some research to be done to nail a good deal. First, you need to know the cost of buying out your lease. Read the fine print of your contract and look for the "purchase option price". This price is set by the leasing company and usually comprises the residual value of the car at the end of the lease plus a purchase-option fee ranging from $300 to $500. When you signed on the dotted line, your monthly payments were calculated as the difference between the vehicle's sticker price and its estimated value at the end of the lease, plus a monthly financing fee. This estimated price of the car value at the end of the lease is what is termed in leasing jargon "residual value". It is the expected depreciation -- or loss in value -- of the vehicle over the scheduled-lease period. For example, a car with a sticker price of $40,000 and a 50% residual percentage will have an estimated $20,000 value at lease end. Now that you know the cost of buying out your lease, you need to determine the actual value, also termed "market value", of your vehicle. So, how much does your car retail for in the market? To pin down a good, solid estimate you need to do some pricing research. Check the price of the vehicle, with similar mileage and condition, with different dealers. Use online pricing websites, such as Cars.com, Edmunds.com and Kelly Blue Book for detailed pricing information. Gleaning pricing information from various sources should give you a fair estimate of your vehicle's retail value. All you have to do now is compare the two amounts. If the residual value is lower than the actual retail value, than you're into a winner. Unfortunately, there is a good chance a car coming off a lease is a little on the high side. Don't despair though. Leasing companies know as much that residual values on their vehicles are greater than their market value and as such are always on the look out for offers. You can knock down on the price of your leased vehicle with some smooth negotiating tactics. Put forward a price that is below your actual target and negotiate hard until you wind up near that figure. How to avoid extra costs at the end of your lease $250 to dispose of your vehicle, $1000 for extra miles you put on the clock and $200 to replace the light bulb and the worn tyres -- lease agents constantly nickel-and-dime consumers when their lease runs out. Here's a rundown of what can trigger those fees, and some steps to take in self-defense. Disposition fee: leasing companies charge you if you choose not to buy the vehicle at the end of your lease. This fee is set as compensation for the expenses of selling, or otherwise disposing of the vehicle. It typically includes administrative charges; the dealer's cost to prepare the car for resale and any other penalties. Make sure this fee is stated clearly in the contract and is agreeable by you before signing on the dotted line. At lease-end, you are left in no position to negotiate as the dealer can apply your refundable security deposit towards this fee. Excess mileage charges: Almost all leasing companies will charge a premium for each mile over the agreed upon mileage stated in your contract. This penalty can be as high as 25 cents per mile and can add up quickly. To avoid the risk of running thousands of dollars in excess mileage penalties at the end of your lease, always check the "per mile" charges in your contract and be realistic about your mileage before you sign any contract. If you think the limit is unrealistic given your commutation needs, then negotiate with the dealer to get a higher mileage or contract for additional miles. Excess tear-and-wear charges: Another potential cost at the end of the lease is any incidental damage done to the car during the lease. This is deemed any excessive damage done to the normal tear and wear of the vehicle. Notice the use of the terms "deemed", "excessive" and "normal". There is no standard formula to define what's "excessive" and "normal" and it's up to the leasing company to assess -- or deem -- the damage and determine what they are going to charge. This leaves you at the mercy of unscrupulous leasing agents who set stringent tear-and-wear standards. Make sure you read the description of these standards, understand them and agree to them. If your leased vehicle is damaged prior to the end of the lease, you may find it cheaper to repair the damage yourself than pay the excessive charges of the leasing agent. In the event of a dispute over the charges at the end of your lease, get an independent third party to do a professional appraisal detailing the amount required to repair any damaged parts or the amount by which tear-and-wear reduces the value of the vehicle. Using lease calculators Want 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: 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're 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. Single-Payment Lease A prepaid lease is a new type of lease which has made 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 two 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 these two charges gives the monthly payments on your lease.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 two to three 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 upfront. How to spot a good car lease Leasing has been lauded as your cheapest ticket to keep up with the industry's hottest vehicles and trends. The jury, however, 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. 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're 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. 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's 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 long-distances, 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. 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". 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. Benefits of leasing Despite aggressive low-interest financing, cash-back offers and other purchasing incentives offered by leading auto-makers to buyers, leasing numbers keep increasing steadily over the years. Leasing is not only an attractive financial proposition to most auto-consumers, but also a lifestyle and preference choice. Benefit Number 1: Keeping up with the latest trends Leasing is sometimes more of a personal and lifestyle choice than a financial one. Many people are not comfortable with the idea of owning a vehicle over a long period of time. They'd rather keep up with the latest trends of the industry and drive the latest models every two to three years. Leasing a car gives you the convenience of having the latest technology and safety innovation, such as an electronic stability system, DVD entertainment systems and advanced stereo equipment. If you are willing to forego ownership for the latest set of wheels, than leasing is your best option. Benefit Number 2: Purchasing Flexibility Leasing also offers purchasing flexibility: it allows you to defer the purchasing decision while using the car. You don't have to haggle with your mechanic over repair expenses, deal with hefty maintenance bills or worry about a depreciating asset. Provided you can keep the vehicle in good condition and stay within the contracted mileage allowance, you're effectively getting a test drive for the length of your lease. At the end of your lease, you can purchase the vehicle or simply turn in the keys and walk away. No questions asked. Benefit Number 3: Cash Flow Leasing offers many short-term benefits. It reduces your initial cash outlay as you do not have to pay the large down payment required for car ownership. You only pay for the depreciation on the car -- only the part you will use during your lease, not the entire vehicle. This results in lower monthly payments and frees even more cash. This cash can be put to use more intelligently elsewhere than the questionable investment of owning a depreciating asset. If you are self-employed or use your car for your job, then you can write off your leasing payment as a business expense. Benefit Number 4: Negotiating Leverage Although it may seem a little unorthodox in this industry, almost everything about leasing is negotiable. If you know all the fees involved, you can lower your monthly payments, negotiate the purchase price of the vehicle at the end of the lease and contract additional miles on top of your mileage limit. You can also do some shopping around and compare deals from different auto-insurers to get the cheapest GAP insurance for your lease. Lease Financing For auto-consumers, crunching the numbers is one of 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 capitalised cost of the vehicle. Well, no quite! When you lease a car, you're 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'll get the average capitalized cost outstanding over the lease term. Let us suppose you're 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 devided 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. Go green and save on your lease Hybrid vehicles' popularity has sharply grown from a couple of thousands in early 2000 to close to 300, 000 by the end of 2005. The trend is rapidly catching with the auto-leasing industry with generous tax credits and incentives on offer if you go green. Beginning in 2006, businesses and taxpayers who lease, or purchase, an environmentally-friendly and fuel-efficient vehicle will be eligible to claim federal income tax credits worth thousands of dollars. Individual states also offer generous incentives, including hybrid state tax credits, new High-Occupancy Vehicle (HOV) lanes access and discounted thruway tolls for alternative-fuelled vehicles. And that's not all you can save from going green! You can now save on your parking fees at a number of universities and some auto-insurance companies are offering insurance discounts for hybrid-vehicle owners nationwide. If you want to take advantage of these incentives and contribute to energy conservation then visit HybridCenter.org and complete a personal profile about your driving needs and habits. You will get in-depth advice on hybrid models that would make economic sense to you and local, state and federal incentives available where you live. Leasing used cars explained Leasing 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. 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.com and Cars.com, 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. Independent Car lease companies To lease, you have two possible choices: either lease through a dealer's finance source or through an 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 or General Motors Acceptance Corporation (GMAC), or a major national bank such as Chase Manhattan. Independent lease companies are no financial obligation to any single one manufacturer financing source, but work with dealers anywhere in the country. So which one is better? Conventional dealers provide better lease-deals on limited-time promotions. Factory-subsidized cars that have 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. Lease Trading Ever wanted to terminate your lease early, comfortable with the thought you weren't going to be hit with hefty fees? You can if you transfer your lease to someone else. 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 BreakAlead.com and TradeAlease.com 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. Luxury Cars and Resale Values When it comes to ultra-luxury, high-end 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. 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 two 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 wheel-drive 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.
How to get out of a lease before your contract expires When your lease is up, you can simply turn in the keys and lease another car or buy a new one. But how about getting out before the lease ends? Maybe you can't afford the sky-high payments on that silky Jaguar JX V6 model anymore or you've just had a baby and you need a larger and more spacious vehicle? Unfortunately getting out of a lease is not as easy as getting in! A leasing contract is difficult and expensive to terminate early. Simply turning in the keys and walking away from a lease can result in stiff penalties. You credit could be ruined and you could even get sued for breach of contract. It's not all doom and gloom though. Actually, there is a number of options available to you. You can sell the car yourself and pay off the bank. This can be cost effective if the market value of the car is close to the buy-out number. Do not hesitate to exercise this option even at a loss if it happens to be lower than the termination fee. Your best option, though, is to transfer your lease for someone who would "assume it" and take it off your hands. There is a whole set of potential buyers looking for short-term leases without all the hassle and extra costs. Check with family and friends or use the services of lease- assumption websites, like swapalease.com, to list your car. Make sure you check the credit worthiness of the new lessee and provide the car in good condition. Leasing Glossary In order to get a good leasing deal, you need to understand leasing jargon. Read through this leasing glossary to get an overview of the basics: 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. Capitalised 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. 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 three 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) 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. 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. 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. 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. 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. 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. 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 How to lease a new car? Whether you lease a car to get into the latest models or have better purchasing flexibility, getting a good deal is always bound to give you a lift. Use these guidelines to help you spot one: Check incentives: be on the look-out for factory -- subsidized lease deals. Car manufacturers realise that consumers who lease vehicles from them are more likely to be repeat customers than those who simply purchase vehicles. Through their leasing companies, they adjust the residual value and offer low financing charge. Other auto-manufacturers are also starting to give incentives on leasing, called leasing subventions. They offer these subsidies to put slow-selling models on the street, saving you even more money. Set up a competitive: bidding environment to get the lowest price. If you already have an idea in mind of the make, model and trim level of your desired car, attempt to calculate your own lease payment before you go shopping to avoid paying through the roof. Check online comparison tools or use a lease calculator to check your lease payment based on purchase price. This gives you greater negotiation leverage as you solicit quotes from various leasing companies. Make sure you know all the fees involved at the beginning of your lease: you may have to pay fees for licenses, registration and title. Other fees include acquisition fees, freight fees and local or state taxes. At lease-end, you may have to pay a disposition fee and charges for extra mileage and any excess wear. Be aware that some of these fees -- like acquisition and disposition fees -- are negotiable. Know your mileage needs: almost all leases limit the number of miles per year by imposing typically 10 to 20 cents per excess mile over 15,000 miles a year. If you are the kind of high-commuter who puts 40,000 miles a year on his car, then you might end up running thousands of dollars in hefty penalties at the end of your lease. Be smart and negotiate a higher-mileage limit or pad you excess miles at the beginning of your lease to avoid robber tax rates for excess miles. Almost all leases limit the number of miles per year by imposing fees typically 10 to 20 cents per mile over 15,000 miles per year. If you are the kind of high-commuter who puts a lot miles on his car, then these costs can add up quickly. Negotiate Include GAP coverage: make sure your lease includes GAP coverage. This covers you in the event of the vehicle getting wrecked, stolen or totalled. Without GAP insurance, you leave yourself wide open to thousands of dollars in leased obligations. Check if the GAP coverage is included so you don't pay it twice. Leasing with bad credit Have you been refused a car lease? Chances are you have less flawed credit history. Know what's 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. 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 three 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. Auto Leasing Scams Car-leasing has been lauded as a more attractive alternative to buying, offering in the process the flexibility to drive a new car for less. The reality, however, is that leasing is an option that is fraught with many pitfalls for the average customer. Leasing regulation does not require as much disclosure as buying a vehicle. This has given rise to many leasing scams that trick the customer into believing they are into a good deal when, in effect, all he is getting is a rough deal on the dealer's terms. Here we look at some of these common scams and how to avoid them Artificially low interest rates: Some dealers quote a lower interest rate when in reality it's much higher. They do this by either purposefully quoting the money factor as the interest rate or calculating the loan without amortizing some closing fees, like the security deposit, into the loan lease. Take the money factor for example: this is typically expressed as a four decimal digit, something like 0.004. Some dealers quote this as a 4% interest rate when in fact you need to multiply it by 24 to get a rough idea of the interest rate on your loan. In this example, the interest rate is a much higher 9.6% than the "quoted" rate of 4%. Make sure you crunch the numbers and understand the formula they use to calculate their interest rate. Look out for any fees not factored into the calculation. If you are not satisfied, do not enter into the lease agreement. Terminate your lease early for a low penalty This is an all-time leasing scam. You ask your dealer how much you will pay if you want to terminate your lease and he tells you: "You want to get out early? Sure thing, you only pay an early termination fee of $300". What he is quoting is only the small administrative penalty of early termination, there is a much stiffer penalty called early termination fee and this runs into thousands of dollars. Do not confuse the early termination administrative penalty with the termination fee. Read the small print carefully and know exactly how much you will get charged should you terminate your lease before its scheduled end. Pay for an extended warranty you don't need This is another shell game to inflate the dealer's profit at your expense. The dealer slides an extended-warranty into the deal whilst it's already factored into the monthly payments, or he tricks you into buying a 36-month warranty on a 24-month lease. You do not have to pay extra money for a warranty already built into your payments or for one that goes well beyond your lease term. They might slip an extended warranty in. Don't be fooled, the warranty is already factored in. No security deposit Any dealer who advertises a $0 security deposit is not telling you the whole story. A security deposit is always factored in the lease under the provision for disposition fees. Buy or Lease? It's the classic dilemma that faces every auto-consumer out there: Pay cash upfront or forego the ownership and pay monthly settlements instead? Buy or lease for a new set of wheels? As is the case with every other common dilemma, there is no slam-dunk answer. Each option has its own benefits and drawbacks, and it all depends on a set of financial and personal considerations. First, your finances. Affordability is clearly key, and you need to ask the question of how stable is your job and how healthy is your general financial situation. The short-term monthly-cost of leasing is significantly lower than the monthly payments when buying: you only pay for "the portion" of the vehicle's cost that you use up during the time you drive it. If you have a lot of cash upfront, then you can opt to pay the down payment, sales taxes -- in cash or rolled into a loan -- and the interest rate determined by your loan company. Buying effectively gives you ownership of the car and that feeling of "free driving" that goes on providing transportation. If, say, you want to get into luxury models but can't afford the upfront cash of purchasing the vehicle than you're a good candidate for leasing. Unlike buying, it gives you the option of not having to fork out the down payment upfront, leaving you to pay a lower money factor that is generally similar to the interest rate on a financing loan. However, these benefits have a price: terminating a lease early or defaulting on your monthly lease payments will result in stiff financial penalties and can ruin your credit. You need to make sure you carve out the monthly lease payment in your budget for the foreseeable future, at least for the duration of the lease. Besides the financial aspect, making a buy or lease decision depends on your own particular lifestyle choices and preferences. Think about what the car means to you: are you the sort of person to bond with the car or would you rather have the excitement of something new? If you want to drive a car for more than fives years, negotiate carefully and buy the car you like. If, on the other hand, you don't like the idea of ownership and prefer to drive a new car every two to three years then you should lease. Next, factor your transportation needs: How many miles do you drive a year? How properly do you maintain your cars? If you answer is: "I drive 40,000 miles a year and I don't really care much about my cars as I don't mind dealing with repair bills", then you're probably better off buying. Leasing is based on the assumption of limited-mileage, usually no more than 12,000 to 15,000 miles a year, and wear-and-tear considerations. Unless you can keep within the prescribed mileage limits and keep the car in a good condition at the end of your lease, you might incur hefty end-of-lease costs. How to calculate your lease payment Understanding how to calculate your monthly lease payment makes it easier for you to make an informed decision. Yet, most of us shy away from the "complicated" math on our lease contract, leaving it up to the dealer to do the payment formula. Actually, it's not that difficult! Once you understand all the figures involved in calculating your monthly payments, everything else falls into place. These key figures are: MSRP (short for Manufacturer's Suggested Retail Price): This is the list price of the vehicle or the window sticker price. Money Factor: This determines the interest rate on your lease. Insist on your dealer to disclose this rate before entering into a lease. Lease Term: The number of months the dealer rents the vehicle. Residual Value: The value of the vehicle at the end of the lease. Again, you can get this figure from the dealer. Now, let us calculate a sample lease payment based on a vehicle with an MSRP (sticker price) value of $25,000 and a money factor of 0.0034 (this is usually quoted as 3.4%). The scheduled-lease is over 3 years and the estimated residual percentage is 55%. The first step is to calculate the residual value of the car. You multiply the MSRP by the residual percentage: $20,000 X .55 = $11,000. The car will be worth $13,750 at the end of the lease, so you'll be using: $20,000 -- $11,000 = $9,000 This amount of $9,000 will be used over a 36 month lease period giving us a monthly payment of: $9,000 / 36 = $250. This is the first part of the monthly payment, called the monthly depreciation charge. The second part of the monthly payment, called the money factor payment, factors the interest charge. It is calculated by adding the MSRP figure to the residual value and multiplying this by the money factor: ($20,000 + $11,000) * 0.0034 = $105.4 Finally, we get the approximate monthly payment by adding the two figures together: $250 + $105.4 = $355.4 To recapitulate, the sample formula looks like this: 1- Monthly Depreciation Charge: MSRP X Depreciation Percentage = Residual Value MSRP -- Residual Value = Depreciation over lease term Depreciation over lease term / lease term (number of months in the lease) = monthly depreciation charge 2- Monthly factor money charge (MSRP + Residual value) X Money factor = money factor payment 3- Sample Monthly Payment: depreciation charge + money factor payment = monthly payment Keep in mind that this is a simplified calculation that does not take into account taxes, fees, rebates or any other incentives. The calculation gives you a ballpark figure or a rough idea of what your lease payments for the vehicle in question should be. Leasing and your credit score. Your 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. 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. Dealer Leasing Tricks Too often when it comes to auto-leasing, people get so dazzled by the myriad terms and the jargon thrown their way that they end-up paying through the nose, relying on a dealer's "help" than their own informed decision. Here is a look at some of the tricks dealers use to pad their profits and leave the customers shelling hundreds of dollars more than the deal should be worth. Trick 1: Leasing always a better deal than buying Dealers use the lure of lower-monthly payments to entice customers to sign for long-term loans, with terms stretching for five years or more, making the payments even lower. There are two catches with such lengthy contracts: higher mileage, exceeding the prescribed limit, and hefty repair costs. With leases charging on average 10 to 20 cents a mile for any extra mile over the agreed amount in the contract, and warranties only covering three years, you leave yourself wide open for hefty charges for excessive mileage and wear and tear. Trick 2: Cheap 2-3% APR rate on your lease The dealer is not quoting the interest rate you would be paying on your lease; he's rather giving you the lease money factor. Whilst similar to an interest rate and important in determining your monthly payment, a more accurate rate is calculated by multiplying the money factor by 24. For example a "cheap" 3% money factor is 24 X 0.003 = 7.2%. This gives you a better sense of what your annual interest rate on your lease contract is. Trick 3: Stress-free early lease termination Dealers know consumer driving needs change and they would like to have the option of getting out of a lease commitment sometime down the road, before their lease ends. Truth of the matter is, when you sign for a lease, you are effectively saddled with monthly payments for the remainder of the lease term and there is little-choice of getting out early. Lease contracts carry hefty financial penalties for either defaulting on monthly payments or terminating the lease earlier than the scheduled term. To avoid being on the receiving end of such tried-and-true tricks, educate yourself about leasing. Get down to the nitty-gritty and understand what the leasing terms used by dealers mean. Crunch the numbers along with him and understand how they arrived at the monthly payment figure. Don't sign anything until you've understood all the terms and your numbers much those of the dealer. Do not let the dealer pressure you into signing; you are the one to determine whether the agreement is right for you.
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