There are many factors to be considered when considering a lease contract -- besides your monthly payments! How much a month? This may seem the most important question to ask, but with a lease it is important to look at other factors that can affect the overall cost to you. In the excitement of purchasing a new vehicle, it can be easy to overlook the total expenditure. The following elements should be examined closely on any lease contract, purchase agreement, or bill of sale.
Buyback (Also called lease-end value, residual value or purchase option)
The buyback figure should be a reasonable estimation of what the vehicle will be worth at the end of the lease, based on the mileage allowed. If the lease is from a new car dealership, traditionally a buyback is based on what the manufacturer has set out as a percentage of the retail list price. Buybacks decrease with time as the model year gets older.
Car companies will sometimes boost the buyback percentage as a promotion to keep the payments lower. The higher the buyback, the lower your monthly payments. This is a bonus when planning to buy the vehicle at the end of the lease, but may not work in your favor if you do buy it out. Often customers will disregard the buyback as unimportant, as they do not plan to buy the vehicle at the end of the lease. Not realizing that should they want out of the lease early or if they were to go over the mileage allowed, the buyback will come into play. Dealerships may mark up the buyback as much as 10% to allow a profit should you buy the vehicle back at the end or break the lease early.
To ensure the buyback figure is reasonable, check out the price of a three- or four-year-old vehicle similar to the one you plan to lease. Ask the dealer if the buyback is negotiable. Can it be lowered without changing the monthly payments? Is there a mark-up for the dealership in the buyback? Is it necessary to buy the vehicle at end of lease? Can the lease be extended at the end of the term? Are you able to re-lease or finance the vehicle at the lease end?
In most cases, the buyback will be optional. The option to purchase the car for a specified price or be able to walk away from it should remain available, provided the mileage restrictions have been met. Be wary of any lease contract that doesn‰t show the buyback and lease-end options right up front. Look for this figure on the bill of sale and the lease contract.
Down Payment
Part of the attraction of a lease is that it can provide low payments with very little cash up front. Standard contracts require up front only; the first payment and a security deposit (normally rounded up from the first month payment). Aside from these costs, any additional money down will be applied to the lease. It can sometimes work out favorably to put a small amount of money down to reduce the monthly payments. Know that any cash down on a lease will only reduce payments and will not change the buyback or interest rate. In the case where you have a large down payment available, consider a regular finance purchase or a "one pay lease." In the latter case, there would be a substantial reduction in the lease interest rate for making all your payments up front.
Understand that cash down can be taxable and that most lease prices advertised do not include freight, delivery expenses and other charges. Read the small print and find out exactly how much money will be required to drive the car away.
Mileage Restrictions
A car with low mileage will be worth more at the end of a lease. Therefore the lower the mileage allowed in the lease contract, the higher the buyback will be. Remember, the higher the buyback, the lower the monthly payments. Customers can fall into the trap of signing a lease with low payments, with the mileage restriction so unreasonably low that they end up exceeding the limit. When a vehicle is returned after exceeding the mileage limit, a per-mile fee will be charged. It can range anywhere from 6 to 20 cents per mile over. That may not seem like much, but consider if you were to do 20,000 miles over at 10 cents per mile, it would cost you $2,000.00. Find out what the over mileage charge is and how much mileage is included in the lease.
It is much better to overestimate mileage than to underestimate it. Often additional mileage can be purchased up front for less than would be paid at the end of the lease. Consider any changes in job or home circumstances that might increase miles to the vehicle at some point in the lease.
Interest Rate (also called service charge factor)
The other ingredient in determining monthly payments, along with the buyback, is the rate of interest. This rate should be in line with what the banks are charging for a car loan. Call and check what interest rate your bank is offering and check the local newspaper. Be aware that this is another place the dealer may add mark-up. Although most rates are determined by the major banks, the car manufacturers and some lease companies may offer better than the going rates. A private leasing company may charge a service fee along with the interest rate. The rate or factor should be shown on the lease contract. Ask if the rate is negotiable or if there are any additional service fees added monthly.
Early Termination of Lease
Definitely look over the conditions of the early termination of a lease. By signing a lease contract, you are responsible for all the monthly payments and the buyback (even if it is optional). Note that the option to walk away from the buyback is only at the natural termination of the lease. Find out what would happen if you didn‰t like the vehicle and wanted to trade it in. Ask if you are able to trade the car at another dealership or if the lease can be transferred to another party with no expense to you.
Vehicle Condition at Turn In
Usually the vehicle condition restrictions are fairly liberal on a lease, but with the used-car market shift and car companies taking leased cars back in droves, these terms may be changing. Restrictions include tire wear, broken glass, damaged body sheet metal, torn or ripped seat fabric and any missing original equipment. It is a good idea to have the vehicle inspected by the dealership a month or so before planning to turn it in to deal with any problems that might arise before the termination date. If, for example, the tires on a "lease return" are past the wear bars, the dealer could deduct the cost of brand new tires from the security deposit or bill you. If this were known in advance, you could purchase used tires for the vehicle with enough tread to pass, saving some big dough.
Some questions to ask about the condition at turn in are: what condition must the car be in to walk away at the end of the lease? Can any accessories be added to the car? Can condition repairs be deducted from the security deposit? Are there any other charges or requirements for which I am responsible?
Leasing is a great way to drive a car with low payments or more accessories than you could have normally afforded. Watch out for hidden expenses and you are sure to have a good experience with your leased vehicle. You may never own a car again!
