When it comes to ultra-luxury, high-end vehicle leasing, there is no doubt that the best deals are those cars that hold their value. With this in mind, we single out a few truths about residual values that consistently apply to high-end leasing.
The most determining factor when it comes to resale values is public perception of the brand, not its reliability ratings in quality surveys. Take the Jaguar for example: it is consistently rated as a quality car, but because of questionable reliability perception among the public, it takes a sharp dip in value at the end of its lease-term
Higher-tech options and other cutting-edge features do not necessarily mean the car will fare better. By the time your car is two years old, better and cheaper systems will render the laser-guided cruise control, navigation systems and built-in cell phone obsolete. Look for functional features, such as automatic transmissions, power windows and wheel-drive to enhance the vehicle’s value in the used-car market.
Used-car buyers view less favorably luxury vehicles that come with big incentives. These are perceived as questionable in quality and reliability.
Monday, April 2, 2012
Leasing used cars explained
Leasing a used vehicle can be an attractive deal in many ways, no least getting you into that luxury model or SUV, for lower monthly payments than a brand new one. Be prepared, however, to do some more homework to dissect a good deal.
As with new car-leasing, your price research should focus on the key figures that are the initial market value and the estimated residual value of the used car. This is harder to predict since there is no factory-set sticker price on used cars, and the residual percentage is very much pegged to a subjective current retail value. Use different sources to get a rough
idea of the value of the used car: your local dealerships, internet car-evaluating tools, such as Edmunds.com and Cars.com, to name but a few.
Another way to pin down a good estimate is to compare the lease on your given car to a lease on a new-car with the same make and model. This should give you a better picture of the difference between leasing new and going for used. Just like leasing a new car, used vehicle leasing is more attractive when residual values depreciate the least. You stand a better chance of finding a bargain in the high-end, luxury vehicles that keep their values better as used cars.
Next, you need to check the initial mileage and the overall vehicle condition. The maximum mileage on a used car should be no more than 12,000 miles a year. A 3-years old car with 50,000 miles on the clock is very unlikely to make a good used-vehicle lease. Check for signs of excessive use, like worn seat fabric, worn pedal pads and dirty engine, which might indicate that the odometer has been rolled back. If the car is not certified, you need to get it thoroughly inspected. Ask your dealer for a manufacturer-sponsored certification program or have your car certified by a qualified mechanic or inspection service.
Most used-car deals don’t come with gap coverage. This is a special type of coverage, normally offered on a new auto-lease, to cover the consumer if the leased vehicle is lost, stolen or damaged. Typically, auto-insurance policies cover only what your car is worth at the time of loss, not what you still owe on the lease. The difference could run into thousands of dollars. For peace of mind, do not enter into any used-car lease without gap-coverage. Arrange it separately with either the lease dealer or your auto-insurance company.
As with new car-leasing, your price research should focus on the key figures that are the initial market value and the estimated residual value of the used car. This is harder to predict since there is no factory-set sticker price on used cars, and the residual percentage is very much pegged to a subjective current retail value. Use different sources to get a rough
idea of the value of the used car: your local dealerships, internet car-evaluating tools, such as Edmunds.com and Cars.com, to name but a few.
Another way to pin down a good estimate is to compare the lease on your given car to a lease on a new-car with the same make and model. This should give you a better picture of the difference between leasing new and going for used. Just like leasing a new car, used vehicle leasing is more attractive when residual values depreciate the least. You stand a better chance of finding a bargain in the high-end, luxury vehicles that keep their values better as used cars.
Next, you need to check the initial mileage and the overall vehicle condition. The maximum mileage on a used car should be no more than 12,000 miles a year. A 3-years old car with 50,000 miles on the clock is very unlikely to make a good used-vehicle lease. Check for signs of excessive use, like worn seat fabric, worn pedal pads and dirty engine, which might indicate that the odometer has been rolled back. If the car is not certified, you need to get it thoroughly inspected. Ask your dealer for a manufacturer-sponsored certification program or have your car certified by a qualified mechanic or inspection service.
Most used-car deals don’t come with gap coverage. This is a special type of coverage, normally offered on a new auto-lease, to cover the consumer if the leased vehicle is lost, stolen or damaged. Typically, auto-insurance policies cover only what your car is worth at the time of loss, not what you still owe on the lease. The difference could run into thousands of dollars. For peace of mind, do not enter into any used-car lease without gap-coverage. Arrange it separately with either the lease dealer or your auto-insurance company.
Lease Financing
For auto-consumers, crunching the numbers is one of the most difficult and confusing aspects of leasing.Take the finance charge on a lease for instance. Most people just don’t understand how this is calculated on capitalised cost AND residual value instead of just the capitalised cost. For most, it seems plainly obvious, just as is the case when purchasing, that a charge should be levied on the capitalised cost of the vehicle.
Well, no quite! When you lease a car, you’re only using the car over a specified period of time with the option of buying the car. The residual value represents the “loan balance” at the end of the lease. If you add it to the capitalized cost and divide by two, you’ll get the average capitalized cost outstanding over the lease term. Let us suppose you’re leasing a car with a capitalized cost of $25,000 and a residual value of $15,000. You average balance over the lease term, irrespective of how long it is, is $20,000 – the sum of the two divided by two -.
Using this sum works because the money factor is the annual interest rate devided by 24, rather than 12. Continuing with our example and assuming an interest rate of 6% APR:
$30,000 X (6 per cent / 24) = $75
(Capitalized cost + residual value) X (interest rate / 24) = Monthly finance charge
This finance charge is added to the depreciation charge to calculate the monthly payments on your lease.
Well, no quite! When you lease a car, you’re only using the car over a specified period of time with the option of buying the car. The residual value represents the “loan balance” at the end of the lease. If you add it to the capitalized cost and divide by two, you’ll get the average capitalized cost outstanding over the lease term. Let us suppose you’re leasing a car with a capitalized cost of $25,000 and a residual value of $15,000. You average balance over the lease term, irrespective of how long it is, is $20,000 – the sum of the two divided by two -.
Using this sum works because the money factor is the annual interest rate devided by 24, rather than 12. Continuing with our example and assuming an interest rate of 6% APR:
$30,000 X (6 per cent / 24) = $75
(Capitalized cost + residual value) X (interest rate / 24) = Monthly finance charge
This finance charge is added to the depreciation charge to calculate the monthly payments on your lease.
How to spot a good car lease
Leasing has been lauded as your cheapest ticket to keep up with the industry’s hottest vehicles and trends. The jury, however, is still out on leasing: with the industry long on hype and short on detail, it is difficult to distinguish between a genuinely good deal and a downright up-selling exercise.
So how do you spot a good deal?
First, you need to find out if there are any down payments on the lease. A down payment refers to the lump sum amount that you pay upfront, either in cash, non-cash credit or trading allowance, to reduce your monthly payment. You should think twice before putting money down on a lease: not only are you getting a rough deal, as you’re essentially forfeiting the general rule of leasing: not putting any cash upfront, but the money is not recoupable at the end of your lease. There is another big disadvantage: in the event of your car getting damaged or stolen, you insurance and the gap cost will not cover the loss.
Mileage Limit
Most leasing companies allow you a limit of 45,000 free miles over the length of a 3-year lease. This may seem like a good deal at first sight, but when you consider it only comes to 15,000 miles over a 12 month period it’s not difficult to foresee why it might be difficult to stay within this limit. Even people working from home have little trouble putting 15,000 miles on their cars.
If you exceed the mileage limit, the penalty for each excess mile can be as high as 20 cents. This can add up quickly over the length of your lease: an additional 4,000 miles a year over the length of a 3-years lease contract, will end up costing you an extra $2,400 in excess mileage charges! Be realistic about your mileage needs, especially if you have to regularly commute over long-distances, before you sign the contract. Consider padding the miles that you expect to use since it is less expensive to contract for the extra before you sign than it is to pay the extra charges at end of your lease.
Sales Tax
Sales tax is usually capitalized and added to the monthly payments. However, some dealers choose not to include it in their calculations to drive the advertised lease payments even lower. What they do instead is state in the small print that the monthly payment excludes “sales tax”. Make sure you carefully read the fine print for any extra, hidden costs not included in the advertised monthly payment. Unscrupulous fees that typically slip through the cracks include sales tax, registration and title fees.
So how do you spot a good deal?
First, you need to find out if there are any down payments on the lease. A down payment refers to the lump sum amount that you pay upfront, either in cash, non-cash credit or trading allowance, to reduce your monthly payment. You should think twice before putting money down on a lease: not only are you getting a rough deal, as you’re essentially forfeiting the general rule of leasing: not putting any cash upfront, but the money is not recoupable at the end of your lease. There is another big disadvantage: in the event of your car getting damaged or stolen, you insurance and the gap cost will not cover the loss.
Mileage Limit
Most leasing companies allow you a limit of 45,000 free miles over the length of a 3-year lease. This may seem like a good deal at first sight, but when you consider it only comes to 15,000 miles over a 12 month period it’s not difficult to foresee why it might be difficult to stay within this limit. Even people working from home have little trouble putting 15,000 miles on their cars.
If you exceed the mileage limit, the penalty for each excess mile can be as high as 20 cents. This can add up quickly over the length of your lease: an additional 4,000 miles a year over the length of a 3-years lease contract, will end up costing you an extra $2,400 in excess mileage charges! Be realistic about your mileage needs, especially if you have to regularly commute over long-distances, before you sign the contract. Consider padding the miles that you expect to use since it is less expensive to contract for the extra before you sign than it is to pay the extra charges at end of your lease.
Sales Tax
Sales tax is usually capitalized and added to the monthly payments. However, some dealers choose not to include it in their calculations to drive the advertised lease payments even lower. What they do instead is state in the small print that the monthly payment excludes “sales tax”. Make sure you carefully read the fine print for any extra, hidden costs not included in the advertised monthly payment. Unscrupulous fees that typically slip through the cracks include sales tax, registration and title fees.
How to calculate your lease payment
Understanding how to calculate your monthly lease payment makes it easier for you to make an informed decision. Yet, most of us shy away from the “complicated” math on our lease contract, leaving it up to the dealer to do the payment formula. Actually, it’s not that difficult! Once you understand all the figures involved in calculating your monthly payments, everything else falls into place. These key figures are:
MSRP (short for Manufacturer’s Suggested Retail Price): This is the list price of the vehicle or the window sticker price. Money Factor: This determines the interest rate on your lease. Insist on your dealer to disclose this rate before entering into a lease.
Lease Term: The number of months the dealer rents the vehicle.
Residual Value: The value of the vehicle at the end of the lease. Again, you can get this figure from the dealer.
Now, let us calculate a sample lease payment based on a vehicle with an MSRP (sticker price) value of $25,000 and a money factor of 0.0034 (this is usually quoted as 3.4%). The scheduled-lease is over 3 years and the estimated residual percentage is 55%.
The first step is to calculate the residual value of the car. You multiply the MSRP by the residual percentage:
$20,000 X .55 = $11,000.
The car will be worth $13,750 at the end of the lease, so you'll be using:
$20,000 – $11,000 = $9,000
This amount of $9,000 will be used over a 36 month lease period giving us a monthly payment of:
$9,000 / 36 = $250.
This is the first part of the monthly payment, called the monthly depreciation charge.
The second part of the monthly payment, called the money factor payment, factors the interest charge. It is calculated by adding the MSRP figure to the residual value and multiplying this by the money factor:
($20,000 + $11,000) * 0.0034 = $105.4
Finally, we get the approximate monthly payment by adding the two figures together:
$250 + $105.4 = $355.4
To recapitulate, the sample formula looks like this:
1- Monthly Depreciation Charge:
MSRP X Depreciation Percentage = Residual Value
MSRP – Residual Value = Depreciation over lease term
Depreciation over lease term / lease term (number of months in the lease) = monthly depreciation charge
2- Monthly factor money charge
(MSRP + Residual value) X Money factor = money factor payment
3- Sample Monthly Payment:
depreciation charge + money factor payment = monthly payment
Keep in mind that this is a simplified calculation that does not take into account taxes, fees, rebates or any other incentives. The calculation gives you a ballpark figure or a rough idea of what your lease payments for the vehicle in question should be.
MSRP (short for Manufacturer’s Suggested Retail Price): This is the list price of the vehicle or the window sticker price. Money Factor: This determines the interest rate on your lease. Insist on your dealer to disclose this rate before entering into a lease.
Lease Term: The number of months the dealer rents the vehicle.
Residual Value: The value of the vehicle at the end of the lease. Again, you can get this figure from the dealer.
Now, let us calculate a sample lease payment based on a vehicle with an MSRP (sticker price) value of $25,000 and a money factor of 0.0034 (this is usually quoted as 3.4%). The scheduled-lease is over 3 years and the estimated residual percentage is 55%.
The first step is to calculate the residual value of the car. You multiply the MSRP by the residual percentage:
$20,000 X .55 = $11,000.
The car will be worth $13,750 at the end of the lease, so you'll be using:
$20,000 – $11,000 = $9,000
This amount of $9,000 will be used over a 36 month lease period giving us a monthly payment of:
$9,000 / 36 = $250.
This is the first part of the monthly payment, called the monthly depreciation charge.
The second part of the monthly payment, called the money factor payment, factors the interest charge. It is calculated by adding the MSRP figure to the residual value and multiplying this by the money factor:
($20,000 + $11,000) * 0.0034 = $105.4
Finally, we get the approximate monthly payment by adding the two figures together:
$250 + $105.4 = $355.4
To recapitulate, the sample formula looks like this:
1- Monthly Depreciation Charge:
MSRP X Depreciation Percentage = Residual Value
MSRP – Residual Value = Depreciation over lease term
Depreciation over lease term / lease term (number of months in the lease) = monthly depreciation charge
2- Monthly factor money charge
(MSRP + Residual value) X Money factor = money factor payment
3- Sample Monthly Payment:
depreciation charge + money factor payment = monthly payment
Keep in mind that this is a simplified calculation that does not take into account taxes, fees, rebates or any other incentives. The calculation gives you a ballpark figure or a rough idea of what your lease payments for the vehicle in question should be.
Go green and save on your lease
Hybrid vehicles’ popularity has sharply grown from a couple of thousands in early 2000 to close to 300, 000 by the end of 2005. The trend is rapidly catching with the auto-leasing industry with generous tax credits and incentives on offer if you go green.
Beginning in 2006, businesses and taxpayers who lease, or purchase, an environmentally-friendly and fuel-efficient vehicle will be eligible to claim federal income tax credits worth thousands of dollars. Individual states also offer generous incentives, including hybrid state tax credits, new High-Occupancy Vehicle (HOV) lanes access and discounted thruway tolls for alternative-fuelled vehicles. And that’s not all you can save from going green! You can now save on your parking fees at a number of universities and some auto-insurance companies are offering insurance discounts for hybrid-vehicle owners nationwide.
If you want to take advantage of these incentives and contribute to energy conservation then visit Hybrid Center.org and complete a personal profile about your driving needs and habits. You will get in-depth advice on hybrid models that would make economic sense to you and local, state and federal incentives available where you live.
Beginning in 2006, businesses and taxpayers who lease, or purchase, an environmentally-friendly and fuel-efficient vehicle will be eligible to claim federal income tax credits worth thousands of dollars. Individual states also offer generous incentives, including hybrid state tax credits, new High-Occupancy Vehicle (HOV) lanes access and discounted thruway tolls for alternative-fuelled vehicles. And that’s not all you can save from going green! You can now save on your parking fees at a number of universities and some auto-insurance companies are offering insurance discounts for hybrid-vehicle owners nationwide.
If you want to take advantage of these incentives and contribute to energy conservation then visit Hybrid Center.org and complete a personal profile about your driving needs and habits. You will get in-depth advice on hybrid models that would make economic sense to you and local, state and federal incentives available where you live.
Buy or Lease?
It’s the classic dilemma that faces every auto-consumer out there: Pay cash upfront or forego the ownership and pay monthly settlements instead? Buy or lease for a new set of wheels? As is the case with every other common dilemma, there is no slam-dunk answer. Each option has its own benefits and drawbacks, and it all depends on a set of financial and personal considerations.
First, your finances. Affordability is clearly key, and you need to ask the question of how stable is your job and how healthy is your general financial situation. The short-term monthly-cost of leasing is significantly lower than the monthly payments when buying: you only pay for “the portion” of the vehicle’s cost that you use up during the time you drive it.
If you have a lot of cash upfront, then you can opt to pay the down payment, sales taxes - in cash or rolled into a loan - and the interest rate determined by your loan company. Buying effectively gives you ownership of the car and that feeling of “free driving” that goes on providing transportation.
If, say, you want to get into luxury models but can’t afford the upfront cash of purchasing the vehicle than you’re a good candidate for leasing. Unlike buying, it gives you the option of not having to fork out the down payment upfront, leaving you to pay a lower money factor that is generally similar to the interest rate on a financing loan. However, these benefits
have a price: terminating a lease early or defaulting on your monthly lease payments will result in stiff financial penalties and can ruin your credit. You need to make sure you carve out the monthly lease payment in your budget for the foreseeable future, at least for the duration of the lease.
Besides the financial aspect, making a buy or lease decision depends on your own particular lifestyle choices and preferences. Think about what the car means to you: are you the sort of person to bond with the car or would you rather have the excitement of something new? If you want to drive a car for more than fives years, negotiate carefully and buy the car you like. If, on the other hand, you don’t like the idea of ownership and prefer to drive a new car every two to three years then you should lease.
Next, factor your transportation needs: How many miles do you drive a year? How properly do you maintain your cars? If you answer is: “I drive 40,000 miles a year and I don’t really care much about my cars as I don’t mind dealing with repair bills”, then you’re probably better off buying. Leasing is based on the assumption of limited-mileage, usually no more than 12,000 to 15,000 miles a year, and wear-and-tear considerations. Unless you can keep within the prescribed mileage limits and keep the car in a good condition at the end of your lease, you might incur hefty end-of-lease costs.
First, your finances. Affordability is clearly key, and you need to ask the question of how stable is your job and how healthy is your general financial situation. The short-term monthly-cost of leasing is significantly lower than the monthly payments when buying: you only pay for “the portion” of the vehicle’s cost that you use up during the time you drive it.
If you have a lot of cash upfront, then you can opt to pay the down payment, sales taxes - in cash or rolled into a loan - and the interest rate determined by your loan company. Buying effectively gives you ownership of the car and that feeling of “free driving” that goes on providing transportation.
If, say, you want to get into luxury models but can’t afford the upfront cash of purchasing the vehicle than you’re a good candidate for leasing. Unlike buying, it gives you the option of not having to fork out the down payment upfront, leaving you to pay a lower money factor that is generally similar to the interest rate on a financing loan. However, these benefits
have a price: terminating a lease early or defaulting on your monthly lease payments will result in stiff financial penalties and can ruin your credit. You need to make sure you carve out the monthly lease payment in your budget for the foreseeable future, at least for the duration of the lease.
Besides the financial aspect, making a buy or lease decision depends on your own particular lifestyle choices and preferences. Think about what the car means to you: are you the sort of person to bond with the car or would you rather have the excitement of something new? If you want to drive a car for more than fives years, negotiate carefully and buy the car you like. If, on the other hand, you don’t like the idea of ownership and prefer to drive a new car every two to three years then you should lease.
Next, factor your transportation needs: How many miles do you drive a year? How properly do you maintain your cars? If you answer is: “I drive 40,000 miles a year and I don’t really care much about my cars as I don’t mind dealing with repair bills”, then you’re probably better off buying. Leasing is based on the assumption of limited-mileage, usually no more than 12,000 to 15,000 miles a year, and wear-and-tear considerations. Unless you can keep within the prescribed mileage limits and keep the car in a good condition at the end of your lease, you might incur hefty end-of-lease costs.
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