Finding a car that meets your needs and your price range
Finding a 'Good' Auto Lease Deal
by Gary Foreman
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The salesperson smiles at you like he's your oldest school buddy. In front of you is a lease agreement that's paragraphs of unintelligible gibberish in print so small you need a magnifying glass to read it. He hands you a pen. You pause. "How do I know that this is a good deal for me?" Good question! Let's see if we can't answer it.
We'll assume that you've already checked to make sure that you're not being taken. The purchase price and residual price on the car seem reasonable. The interest rate being used to calculate your payments isn't unreasonable. So you at least know that the deal isn't a real stinker.
But, now let's find out if the deal is a good match for your specific needs. Begin by considering the trade-in allowance for your existing car. Is the offer fair compared to what you could get if you sold the car yourself? You'll also want to see where in the transaction the leasing company is giving you credit for your trade-in. Remember, it's just as if you gave them cash for the value of your old car. Make sure that they're not giving your credit at the end of the lease or in some complicated formula.
Is the car you're about to lease a good 'lease car'? Not all cars are created equal here. You want a car that will hold it's value well during the lease period. Some cars depreciate more than others in the first few years. Suppose you're about to lease a mini-van. There are two easy ways to do a comparison. Take the wholesale value of a three year old Voyager and divide it by the cost of a similarly equipped new one. Now do the same for a Chevy Lumina. The ratio you've calculated is the percent of purchase price that the car maintains after three years. You'd be surprised at how often the percentages vary significantly from model to model. The higher the ratio, the better your lease deal will be.
You can do the same thing by comparing the purchase and 'residual value' in two lease agreements for different models. It's best if you can do this using leases from the same company. Again, the cars may cost nearly the same now, but be worth very different amounts in three years.
Next, take a look at the down payment. It shouldn't be much more than two times the monthly payment. One of the advantages of leasing is that you don't have a big 'up-front' cost. The salesman will tell you that a large down payment will reduce the car's 'capitalized cost'. That's true. But you can also reduce that capitalized cost by negotiating a lower original price for the car, too. I'd rather negotiate than write a bigger check!
Now we need to get personal. How do you use your car? You'll need to know if you're going to find the best lease deal. If you're not 'typical' or 'average' you won't find a lease that matches your needs without shopping around. Leases are written to accommodate average drivers and give a margin for error to the Leasing Company. As the ads say, 'your mileage may vary'. Let's see how that makes a difference.
First, how long do you want to keep a new car? No, I didn't ask how long the lease was. When do you expect to want to replace this new vehicle? And why? Perhaps you're the type who likes the smell of a new car every three years and you have the income to do it. Ok, go find a three year lease.
But, if you're watching your pennies, you need to ask some questions. Is there anything that could cause you to want to get rid of the car (or the payment) before the lease is up? A lost job, new baby or who knows what could cause you to want out. If that's a possibility make sure you negotiate a good 'termination clause' or choose a different length lease.
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Maybe you expect to drive the car longer. A longer lease would lower your monthly payments. Or you could buy the car at the end of the lease. In either case, now is the time to think through the alternatives and make sure the lease meets your needs for the future.
One other major ingredient in any lease agreement is the mileage charges. It's easy to assume that a large annual mileage allowance is best. After all, that way you won't have to pay per mile charges. But let's think about what really happens here.
Suppose the Leasing Company gave you a really generous 25,000 annual mileage allowance on a three year lease. "Boy, I'll never go over that!" you think. But the Leasing Company is assuming that you're going to use all 75,000 miles. So they're going to figure that the car will be pretty well worn when you turn it in. And the residual value will be lowered accordingly. And, yes, you guessed it...your monthly payment will be higher!
The best lease is going to match the mileage that you really will use. Consider the car you're replacing. How many miles have you put on it in a similar amount of time? What changes in lifestyle would cause you to adjust that number up or down? You'll do better if you work with the Leasing Company up front. Don't try to fool them. The best deal will allow just a few miles more than you really use over the whole lease.
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Now is also the time to find out about 'excess wear and tear'. Understand what is meant by the term, how it will be calculated and how much it could cost you when you turn the car in.
'Gap Insurance' is another decision you'll need to make. It covers you if you total the car and your regular auto insurance doesn't cover the whole amount you owe the Leasing Company. It's possible that the difference could run into the thousands of dollars. Now's the time to consider how you'd handle this unexpected event. Buying insurance to cover the gap could be your best solution.
You can find a good lease agreement. Wading through all the fine print and legal-speak is possible. Begin with an understanding of your needs. Then add some research and a bit of negotiation. You'll end up with an auto lease arrangement that you won't regret later.
Reviewed June 2017
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
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