Monday, October 17, 2016

Should I Lease? Part 4 of 4 ~ Ok, I'm going to lease. Gimme the details!

If you have made the decision to look at a lease option for your new vehicle purchase, how should it be set up?  Unfortunately, many people see an advertised lease, and assume that is the way it needs to be structured.  Like so many myths about leasing, this one is not true.  A wise consumer will look at the structure presented and make sure it fits for their personal needs.

Let me give you an example. Often, an advertised lease includes the lowest allowable miles offered by the lease company, and includes a fairly sizable down payment, in order to feature an attractive payment.  Even leases that are listed as “zero down” leases may still include some money out of pocket.

How can this be?  There are two parts of the “cash due at signing” in a lease.  One part is down payment.  This is the money that you put into the deal up front in order to lower the monthly payment, and it’s the part that is described in most “zero down” lease advertising.  The second part is comprised of the taxes, license fees for the first year, down payment, and origination fees.  This money is technically not down payment.  It consists only of fees.  So a “zero down” lease may still have you paying a significant amount of money to start the lease.  While this may seem tricky and underhanded, there is actually a reasonable explanation for it.  In many places, taxes and fees can vary from town to town and county to county.  Additionally, many dealers are close to state lines, and these fees vary from state to state.  There is simply no way to advertise an inclusive “total due at signing” in many areas, with because of this, so they are discussed apart from the down payment figure.

Another factor is the length of the lease.  Lease contracts are often short term, such as 24 months, 27 months, 36 months, or 39 months.  You may also see 42 months, 48 months, or even 60 months. Vehicle manufacturers frequently will “feature” a particular term, by tweaking the interest rate (money factor), lease-end value (residual), or even cash incentives.  Because of this, you may see a more attractive payment on 39 months than you do on 36 months, for example.  My recommendation is to keep lease terms on the shorter side (39 months or less), because the car is covered by factory warranty for all or most of the contract term.  By extending out to 48 to 60 months, you are removing many of the advantages of a lease vs. a loan.

Finally let’s talk about how many miles are included in your lease.  Figure out how many miles you typically use.  Do you drive 1000 miles a month or less (12000 miles/year)?  Do you drive 1250 miles a month or less (15000/year)?  Allowable miles can often be set at 10,000 miles/year, 12000 miles/year, 15000 miles/year, or more.  The ad you saw will probably feature 10,000 or 12,000 miles/year. That is the number of miles that have been bought with your payment.  If, at the end of the lease, you have used more miles than you have paid for, you will be billed for the extra miles when you turn it in (see previous articles).  My recommendation is to not only structure the lease to include more miles than you typically drive, because it can help to eliminate the anxiety of running up against your mileage “limit” (another myth) and feeling like you can’t or shouldn’t drive the car you’re paying for.  That’s a frustrating feeling, and can lead to feeling like you don’t like leasing.  In this case, it’s not that you dislike leasing, but your lease wasn’t structured to give you the freedom to use your leased vehicle as you would like.  By setting up your lease for 15000 miles/year when you normally use 12000 miles/year, you free yourself up to take that extra day-trip or vacation, or to make the necessary medical trips when the unforeseen happens.  Keep in mind that you can set up your lease for more than 15000 miles/year if needed, as well.  Additionally, if you drive more than 12000 miles/year, it is advisable to try to keep the length of your lease in the 24/27 month area, in order to keep yourself in factory warranty for as much of the contract as possible.  If you go 36 months, you’re going to use 45000 miles (most new vehicle limited warranties end at 36000 miles).

So you know how long you’re going to lease for, and how many miles you are going to include to give yourself a buffer to allow for “life” during the contract.  How much cash should you put in to start your lease?  Again, most ads will feature $1000 down plus ttl (tax, title & license – and maybe fees), $2000 down plus ttl, $3500 down plus ttl, etc.  They are advertised this way because down payment on a short contract has a greater payment impact than it does on longer terms, so they can advertise super-attractive low payments.  My recommendation is to start the lease with less cash down, when possible.  Why?  Well, the down payment is not saving you anything other than monthly payment.  It’s not reducing your lease end value.  It’s not really saving you interest (money factor).  That means that, at the end of the lease, if you’re leasing another new vehicle, you will need similar down payment to keep your budget in line. If you don’t have that much down payment next time, you will either need a higher monthly payment, or you’ll need to get less vehicle.

Another aspect to this decision is what happens if the vehicle is stolen or destroyed during the lease.  Nearly all leases include a product called G.A.P. insurance.  This protects you and the lease company in the event of a total-loss accident or nature event, or if the vehicle is stolen.  The insurance company is only going to pay what the market value of the vehicle is of the vehicle at the time of the loss, regardless of how much is owed against the lease/loan.  Frequently, early in a contract, the payoff is greater than the market value, so that leaves a balance due when a vehicle is totaled.  G.A.P. pays this difference.  What G.A.P. doesn’t do is reimburse you for your down payment.  So if you put $3000 down, $5000 down, or more, and the vehicle is totaled out, you will again need the large down payment to get to your budgeted payment on a replacement vehicle (or you need to go to a cheaper payment, or accept a much higher monthly payment, as described above). 

Summing up, if you’re looking at lease terms, I advise structuring the lease to include more than enough miles for your typical driving (include a “buffer” of miles to allow for extra driving without anxiety of going over the miles of the contract).  I advise keeping the term short enough that you will have factory warranty coverage for most or all of the lease contract.  I advise keeping your down payment as low as possible to make it easier when it comes time to replace your vehicle with another one (either at lease end, or if the vehicle is a total loss during the lease term).  Don’t assume the lease you see advertised is the only way you can structure the lease.  Ask for the lease to be customized to the time, miles, and cash due at signing that will fit for you.  By setting up the lease to fit your life, you can enjoy leasing car after car, keeping in warranty.  By leasing new cars, buying tires, brakes and batteries can virtually be a thing of the past for you!

I hope this article has been helpful.  Happy shopping!

Mike Bidwell
Mankato Motor Co.

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