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How to Avoid Car Leasing Charges

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Leasing a car or truck is a different transaction than an outright purchase and it’s important to understand the differences. When you lease a car you make monthly payments to drive a new or used vehicle for a few years. Essentially, you pay for the portion of the value of the car you use during the lease term. At the end, you turn the car in and pay any fees due. You have no equity in a vehicle you lease.

In contrast, when you purchase a car, you make monthly payments to own the vehicle outright. At the end of your loan, you own the car and can do with it what you like. You can lease or buy both new and used cars.

As the average price of a new car reaches $37,185, and a used car hits a $20,247, according to LendingTree, leasing is a popular option to afford a new vehicle.

While the transactions are different, there are many terms that leasing and buying share. It’s important to understand what you are signing before you drive away with your new vehicle. It’s also important to understand what is negotiable and what isn’t when it comes to leasing. Read on to find out where you can save on a lease.

What are the most important numbers to focus on when you’re signing a lease deal?

Just like a purchase, many terms in a lease deal can be negotiated at the dealership. The best deals happen when you’re prepared. Do your homework before you start negotiating, so you know the value of the vehicle you want and the value of your trade-in if you have one. When you find a car you like and start negotiating your lease deal, focus on these numbers.

Capitalized cost

The capitalized cost is the amount you’re financing when you do a lease deal. It is the most significant factor in how much your monthly payments will be, noted Matt Delorenzo, senior managing editor at Kelley Blue Book, a vehicle valuation site.

Basically, your lease payment is based on the difference between capital cost and the residual cost, or the value of the car at the end of the lease. If you start with a lower capital cost, your monthly payment will be lower. You can negotiate the capitalized cost, or the starting value of the car, in a lease much like you do in a purchase. You may be able to save hundreds of even thousands off the price of the car.

Capital cost reduction

A capital cost reduction, sometimes called cap cost reduction, is an upfront payment that you make to reduce the amount of money that you will finance under the lease. A capital cost reduction can include a trade-in as well as a cash payment.

By increasing your capital cost reduction, you can lower your monthly payment because it  reduces the amount of money you’re financing. Keep in mind, this is separate from other upfront money such as taxes, license and registration. Those are usually government-imposed fees, nonnegotiable and excluded from cap cost reduction.

A general rule of thumb is to avoid paying too much money down on a lease to reduce your monthly payments. This is because putting a ton of money down upfront won’t actually save you money since the car takes a huge depreciation hit the moment it rolls off the lot. All you are doing by putting more money down as capital cost reduction is offsetting that depreciation.

Money factor

A money factor is another way to express the interest rate you may pay for a lease. Similar to the interest rate on a loan, the money factor you’ll get is determined in large part by your credit score. You can’t negotiate the money factor directly, but you can look for financing sources that offer better terms.

Instead of an annual percentage rate (APR) like a loan, you’ll see the lease money factor presented as a decimal, like .002. To convert to APR, multiply by 2,400. That means a money factor of .0025 is equal to an APR of 6%. A dealer may also quote a lease charge, which is the total amount of the money factor paid on the lease.

Like an interest rate, the lower the money factor number, the less you will pay.  When you convert the money factor to an APR, it should be close to or better than the rate you can find for buying the car. Manufacturers frequently offer incentive rates through their in-house financing companies.

There are some rules of thumb to watch for, even if you can’t do the calculations quickly. If you’re offered a money factor that is a decimal followed by three zeros, (0.0009, or a 2.16% equivalent APR), you’re likely looking at a good low incentive rate. If the rate is has two zeros and a 25 (0.0025, or 6%) or less, that’s an average rate. A money factor that has two zeros and anything above 35 (0.0035, or 8.4%) would be considered a high interest rate.

Lease term

The length of the lease also impacts your monthly payments. Shorter leases usually have lower payments because you’re financing less. Common lease terms range from 24 to 48 months, although longer and shorter terms are possible. Midrange terms such as 36 or 42 months are becoming more common. The lease term is usually set by the manufacturer or finance company, depending in part on the expected residual value of the car. A lower price will often have a shorter lease so it will have a higher residual value for the dealership to sell as a used car. You can’t really negotiate the terms, but you can pick the one that makes sense for your budget.

Mileage cap

A mileage cap is the number of miles covered by the lease deal. Common mileage caps are 10,000, 12,000 or 15,000 miles per year. The rate for excess miles will be set down in the lease contract.

Don’t underestimate the mileage you drive per year. It’s almost always cheaper to pay for more mileage as part of the lease than pay overage charges at the end. Know what the fees are for excess mileage before you sign on the dotted line. Depending on the lease agreement, if you drive under the allowed mileage you won’t get a refund. But if you purchase an extra chunk of miles, you may get a refund for unused miles.

Mileage fees can range from 15 cents to 30 cents per mile. The most attractive lease payments in advertisements are usually for cars with a 10,000-mile-a-year mileage cap, which is well below the national average most people drive: 13,476 miles per year.

Disposition fee

A disposition fee is the fee that the dealership will charge at the end of the lease term to take the car back.

Early termination fee

Make sure you know how much it will cost if you end the lease early. Dealers may waive the fee if you purchase the car or transition into another vehicle at the dealership.

Which fees can you negotiate in a lease?

Most people assume that the dealer’s price is set in stone when buying or leasing a car, but that’s not the case. There are plenty of places you can negotiate a deal when looking for the right vehicle for you. While the dealer may not have the ability to haggle over every fee, if you are armed with information on the value of the car you want to lease, you could negotiate savings up to $2,000 on a lease, Delorenzo said.

The most significant levers that you can pull in a lease are similar to what you can negotiate in a purchase: the amount of purchase, a down payment, the length of term and the interest rate. Here are the key things to focus on when negotiating a lease.

Capital cost

Lease advertisements typically quote the sticker price of a specific car, usually identified by the dealer’s stock number in an advertisement. The advertised price applies only to that individual car, although it may be applicable to other cars with the same trim level and options. Even if the price is quoted in an ad, it’s still subject to negotiation.

“The part of a lease that a lot of people overlook that can be negotiated is the actual sales price of the vehicle,” said Scot Hall, chief operating officer of Cincinnati-based

Here’s how to negotiate the capital cost: Before you make a final deal, research the market value of the car you’d like to lease. Don’t be satisfied with the window sticker price or even the invoice price.

“You should know the fair market value of the vehicle or what people are actually paying for the car versus the MSRP and the invoice,” Delorenzo said. That’s the number you should offer to use as the starting capitalized cost or purchase price of the car.

Popular cars will hold their value better over the life of the lease and be worth more at the end. So the capitalized cost will be less because the residual value will be higher.

“The dealer will have a little more flexibility in the lease terms because he realizes he’s going to make money on the back end with a low-mileage, late-model used car that he can sell at a good price,” Delorenzo said.

Capital cost reduction

As discussed above, paying money upfront will reduce your monthly payment on a lease. Some experts recommend putting down as little as possible, however, and making the payments from your monthly budget. A zero-down lease means you’re not making a down payment to reduce the capitalized cost.

Hall recommended putting down as little money as possible on a lease assuming you’re comfortable with the payments. Essentially by putting down capital cost cash you are lowering your monthly payments because you have paid more down on the value of the vehicle. While paying less might sound like a good idea, it’s really just a shell game and it could end up costing you more in the long run.

Lease term

You could opt for a longer lease term that could make the monthly payments lower but will increase the amount of interest you pay.

Money factor

You can ask the dealer if they can find a better rate. Or, you find your own financing from a bank, credit union or online sources For incentive programs through the manufacturer, the money factor rates may be the best you can find. The money factor itself isn’t usually negotiable, but you can ask the dealer to find a better rate or find a rate on your own.

Acquisition and disposition fees

These fees may not always be negotiable, but it never hurts to ask, particularly about the disposition fees. The dealer may waive them as an incentive for you to lease or buy another car, if you decide that you want a new car within the same brand.

“If you are a returning customer and you have built a relationship with the dealership, you may find that there’s a lot more flexibility in doing a deal,” Delorenzo said.

Mileage fees

Here’s where knowing your driving habits will pay off. Say you get a 10,000 mile-a-year lease but drive 15,000 miles, and excess mileage (or miles you drive above your agreed-to limit) will cost you an additional $0.25 per mile. At the end of the least you’d owe $3,750 for excess mileage. That’s a significant additional cost, and thus, it makes sense to spring for a higher mileage lease if you can.

You may be able to purchase a block of additional miles at the beginning of the lease. If there are any miles left over, you may get a refund. If you typically drive a lot but not as much as the next tier of the lease mileage, you could purchase additional miles to cover the difference. For instance, if you think you’ll drive more than 10,000 miles per year over three years, but less than 15,000 miles, you could purchase 7,500 additional miles.

One additional thing to note: If you’re looking at leasing a car that’s part of a manufacturer’s incentive program, you already may be looking at a good deal that that wouldn’t allow for or need any further negotiation. The manufacturer’s captive finance arm – think Toyota Financial Services or Ford Credit – may subsidize key parts of the deal, such as the money factor and the residual cost of the car at the end of the lease, according to Hall.

“Generally speaking, those lease specials that they’re running are going to be more attractive than what you can get at the bank,” he said.

Delorenzo agrees. “The bigger the incentives that are baked into the lease deal, the less flexibility you’ll have from a negotiating point of view because the dealer’s margins are going to be smaller,” he said.

If you’re interested in leasing a vehicle that’s not part of an incentive program, you can still seek financing from the dealer or your own lender. A bank or credit union may have standard rates for leases that are not subsidized by the manufacturer, Hall noted. If the car you want is not part of an incentive program, then the dealer may not offer the lowest rates. You may be able to find better rates from other sources.

The bottom line

Don’t be intimidated by negotiating a lease. Armed with knowledge, you could save as much as a few thousand dollars on the deal. Do your homework first. Research the market value of the vehicle you’d like to drive home, any current dealer incentive programs and your financial situation. Also, be aware that the dealer may be offering a pretty good deal, thanks to manufacturer’s incentives. It may be hard to beat that deal through negotiation.


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