should I buy or should I lease - a primer
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Please read- this unofficial independent Subaru research site by Joe Spitz is designed to help you learn about Subarus, and on this page about leasing. It is not sponsored, authorized, supported or approved by Subaru or any dealer or financial institution and is not connected to or affiliated with, any dealer. it is not an offer to finance or lease. Always contact your local dealer. Information subject to change, correction, updating.
for visiting. you are here: http://www.cars101.com/lease.html v 6.2.09
Leasing a car is simply another way of making payments.
The basic difference between
a purchase and a lease
A lease is basically a 'rent to own' where you have the option to keep or return the vehicle at the end of the term.
You still get to negotiate the price. Note that on a lease the price of the car is called the 'capitalized cost'.
The bank holds the title until the last payment is made. Whether you buy or lease, the bank always holds the title.
Why lease, what are the
benefits to leasing
leasing offers a way to save money with short term commitments.
It can make a car more affordable: lower monthly payments, less downpayment, less sales tax paid, less maintenance
Payments are lower since they're primarily based on the depreciation, which is why 36-42 month leases are frequently the best deal.
Less downpayment- only 1st payment, tax, and license/registration fees are due
Sales tax is typically paid on the monthly payment amount, not the entire purchase amount ( a few states do charge the full amount upfront).
Less maintenance: short term leasing reduces the need for the maintenance and upkeep expenses which come as miles accumulate.
Yes you have payments but
you know what they'll be for the term, and they're on a new car with full
warranty and minimal maintenance requirements.
The typical car at 60,000 service has had at least one new set of tires and brakes, 2 tune-ups, and other misc expenses. A 60,000 mile service can be $600 up.
Downside to leasing:
You don't own the car, you don't have a paid for car at the end. .
Keep in mind that a paid-off car is older and due for ongoing maintenance.
There's an old expression that says "when you're done paying the bank for the car, it's time to start saving to pay the mechanic".
HERE IS A SAMPLE
LEASE - PURCHASE COMPARISON
Note: this is a real
calculation for lease and purchase educational and comparison purposes
Hypothetical car: MSRP $26790,
Actual purchase price /capitalized cost paid $25,600
|MSRP of car||$26790||$26790|
|purchase/lease price paid for car||$25600 (this is the cap cost)||$25600|
|sales tax rates||9.8% paid on monthly payment
(a few states do require it upfront)
|9.8% paid upfront on purchase price|
|license/registration fee- paid yearly||$150||$150|
|lease money factor or
purchase interest rate
|acquisition fee||$700 (included in payment)||0|
|term, months||36 months (36,000 miles)||60 months (60,000 miles)|
|payment||$389 + $38 tax (9.8%) = $427||$507|
|Disposition fee paid to leasing company at end of lease||$250||--|
|sales tax that was paid||$1,368||$2,508|
|residual||$14,734 (55%), at 36 months||$0, all paid for at 60 months|
|total paid so far (see below)||$16,497||$31,295|
|warranty 3 years/36,000
5 years/60,000 powertrain
|everything is covered||ended|
and normal upkeep
estimated, hypothetical costs:
yearly registration- $150
oil changes $40 every 5000 miles
tire rotations $20 every 7500 miles
car battery $100
|2 years registration
at $150- $300
6 oil changes -240
4 tire rotations-80
30,000 tune up- $450
under warranty- brakes, battery, wiper blades, remote batteries,
Total service/upkeep- $1,070
|4 years registration
at $150- $600
12 oil changes - $480
8 tire rotations $160
30,000 tuneup- $450
60k tuneup, accessory belts etc $650
brakes (at 40k)- $650
tires (at 40k)- $600
wiper blades 25
Total service/upkeep - $3,715
|TOTAL PAID the total of everything paid though the end of the payment term in this hypothetical example||
|result||start again with brand new car||car paid for with equity, no warranty left, start saving for repairs, maintenance and upkeep|
Comments the good and the bad, it all costs money,
There's just no free transportation
Purchase- the benefit
Lease- the benefit
a term of puchase payments, typically 48-60-72 months.
Price You still
get to negotiate the price, which on a lease is called the 'capitalized
Downpayment: goes against the total price of the car + full tax and license fees, and reduces the payment and principal balance owed.
Due at signing: optional, based on credit history
Tax You pay all the sales tax upfront when you buy the car, tax is based on the full purchase price.
Example, on a $20,000 car with 8% sales tax, $1600 would be added to the purchase price.
Title The bank holds the title until the last payment is made and the car is paid off.
a term of lease payment term (months)
Price You still
get to negotiate the price, which on a lease is called the 'capitalized
Downpayment: minimal amount, goes against the amount depreciated and any extra pre-pays the remaining payments by an equal amount. It does not lower the lease end value/residual.
Due at signing: 1st payment + tax on the payment, license and document fees. Anything over that just goes against the remaining payments
Tax You only pay sales tax on the monthly payment! You don't pay it on the total amount like on a purchase.
Example, on a $20,000 car with a $300 lease payment + 8% tax, the payment would total $300 +$24 tax = $324.
In Washington State, sales tax is based on where you live, not where you lease the car.
Title The bank still
holds the title until the last payment is made.
Term typically the lease payment term 36-39-42 months, and miles to be driven.
At the end of the lease
term you have the option of
1. returning the vehicle to the bank or dealer in appropriate condition. Note, there may be a disposal fee.
2. purchasing it for the unpaid portion, called the Residual, Lease End Value or Purchase Option. You have all normal options for paying the balance- cash, finance etc
You'll be able to save money because payments are not based on the entire car price because you're not buying the entire car as in a purchase, you're paying for the agreed time and miles.
At the end is the Lease
End Value, aka residual or purchase option.
If you want the car you can buy it. If not, you can walk away. Whether the car is actually worth that amount is another issue. If it isn't, the bank takes the risk and loss when they sell it at auction.
If it's a popular car with strong resale, the residual value could be a very good deal.
If it's not a popular car and is worth less than the residual, the bank will take a loss when you return the car and they sell it at auction.
When you lease
Annual mileage- this is important. How far do you drive per year?
Try to be accurate because the charge for excess miles if you want to return the car at the end of the lease can be expensive.
So consider your commute, vacation trips, everyday driving. is it possible your driving might change in a year or two?
Leases are generally constucted around 10,000-12,000-15,000 miles per year. More than that is available.
Gap Insurance, many
leases include Gap which covers pay-off difference between what an insurance
company will pay and the value of the car in an accident.
Price, aka Capitalized Cost: this is the negotiated price of the car.
Residual, aka 'Lease End Value' or 'purchase option'- the amount you can purchase the car for at the end of the lease.
This lease end value is a percent of the original MSRP. The longer the lease, the less the residual value is.
Lease end values are calculated and determined many ways. Automotive Lease Guide (ALG.com) is a leading provider.
example: a car with a MSRP
$30,000 and a 50% lease end value will have a residual of $15000. With
a 40% lease end value the residual would be $12,000.
The capitalized cost, the agreed upon price, does not change the residual though obviously does lower your payments.
Money Factor: what the
lender uses to calculate the payments. This is not an interest rate.
You can convert a money factor to an interest rate by multiplying by 2,400 regardless of the length of the loan.
Lessee The person
leasing the car.
Lessor The lender or bank you are leasing the car from. This isn't the dealer, its the finance company.
Money factor: This is the interest rate you are paying on the car. It is expressed in a fraction of a percentage point. You can convert a money factor to an interest rate by multiplying by 2,400 regardless of the length of the loan.
Security deposit: This is usually equal to one monthly payment. Often waived by the lender or dealer, based on credit.
Early termination: A penalty or fee that must be paid to get out of the lease before the term is up.
Excess wear and tear: Wear and damage to the vehicle beyond what would be considered normal for its mileage and age
Gap Insurance, many leases include Gap which covers pay-off difference between what an insurance company will pay and the value of the car in an accident.
Closed End Lease: almost all leases these days are closed-end, thats a good thing. It means that if you return the car with normal wear and tear you can walk away, even if the vehicle's true value is less than the value estimated at signing. (An open-ended lease is where the lessee agrees to a floating lease end value or residual, and an open ended lease is a bad idea for most consumers.)
Some, but not all, car leases require an up-front cash security deposit. It's a fee that is usually about the same the monthly payment amount. The fee will be refunded to you at lease-end, less any disposition, mileage, or damage charges. If you have a good credit rating or have leased with the same finance company before, you may not have to make a security deposit.
Acquisition fee: amount built into the lease and paid to the lender to set up the lease, charged by the leasing company. This fee may not be shown in the contract, but is included in your. Typically app $600-900, depending on the lease company. This fee is set and required by the lease company but dealers have some flexibility in the amount.
A required fee at the end of the lease. Amount varies by the lease company. Depending on the lease company policies, it may be required whether you buy or return the car at lease end. To offset the lenders lease end expenses.