Buyer beware of Lemon Cars

If you're new here, you may want to subscribe to our Newsletter by using the form on top left and/or RSS feed for the latest updates. Take some time to leave comments too :-) Thanks for visiting!

Buyer beware of Lemon Cars

There are many traps and pitfalls waiting for the innocent consumer.

Buying in good faith, unfortunately, has become a thing of the past and every care should be taken when buying the second most expensive item on the shopping list - that is, the motor car or your new BMW.

The United States brought in the ‘lemon law’ to protect the consumer against unscrupulous dealers who will sell just about anything to an unsuspecting public.

When it applies to cars and motor vehicles it is supremely important since these vehicles can in some instances be death traps.

Unfortunately, this law is interpreted in different ways in different states.

The lemon law forces manufacturers to buy back ‘lemons’ and replace the vehicle or refund the buyer by way of compensation.

However, as mentioned earlier, not all sellers are good guys. Did you know that the lemon you sold back to them can be back on the market in a relatively short time devoid of its dubious history?

It merely stores it for a short time and then sells through a ‘dealers only’ auction and the history does not follow the car.

The next person to purchase it will be opening a virtual Pandora’s Box of problems.

It really is a case of ‘buyers beware’ whenever you make purchases but perhaps in the case of cars then extra care should be taken.

It may be wise to take along a trusted professional mechanic to check out the vehicle before you make that all important decision. A little extra cost at this stage may save your life in future.

Avoid Buying Lemons BMW

Avoid buying lemons BMW

When you finally make the decision to purchase a new BMW car the last thing you would expect to find is that the car is defective in one way or the other.

However, this does happen - albeit on a small scale - and there are lemon laws in place - both federal and state, to force the manufacturer to replace, repair or refund.

But what do you look out for when you are buying a used car? Sometimes the fault is very obvious.

Maybe you can see a kind of ripple effect down the side of the car when viewed from either end. This could mean that the car had collided with something forcing the metal body to warp in ripple like patterns.

Or perhaps the car is a different color on one side or at the back or front. Careful here, this could denote a ‘cut and shut’ type vehicle which is highly dangerous.

The car is literally two vehicles welded together.
Maybe the car (or part of it) was stolen and has been passed off as being legitimate.

Most times faults are not obvious and great care should be taken to check out the history of the vehicle.

Remember the old adage - buy in haste repent at leisure? - well in this kind of case your grandma was right.

Never buy in a hurry and get some kind of organization to check out the vehicle for you. It may cost a little more in the long run but you will be assured of a reasonably safe vehicle and avoid litigation.

Get Auto Loan For A New Car Even with Bad Credit

You Can Get An Auto Loan For A New BMW Car Even If You Have Bad Credit

Contrary to popular belief, your options for an auto loan are better on a new car, even with poor credit. New cars as opposed to used ones have a fixed starting value and a fixed depreciation schedule, which enables lenders to make an informed decision. New cars also come with a warranty from the manufacturer, which allows the consumer to avoid maintenance expenses and use that saved money towards the loan payments.

While new cars come with a warranty which usually lasts 5 years for bumper to bumper and 10 years for the engine, the average auto loan is between 6 and 7 years long. Buyers should be aware of this and plan their budget accordingly. After the warranty ends, the buyer will still have loan payments and must then assume the expense of maintaining the vehicle.

Another important factor to understand when purchasing a new car is, your credit score does affect your loan rates. Most people don’t even know their credit score upon their decision to purchase a vehicle. The consumer should get a copy of their credit report prior to initiating the buying process. Special new car programs such as 0% financing is often made unavailable to individuals with bad credit and even is unavailable to people with good credit. Knowing your credit situation prior to buying, will allow you to negotiate the best deal and respond to objections you may find when trying to obtain your auto loan.

Requesting a car loan through several different lenders could temporarily lower your credit score! You should apply to a program that offers you several different lender rates. Multiple credit requests result in a short-term lowering of your credit score, even if no new debt is incurred. To prevent multiple credit requests, apply for a car loan through Any Credit Auto Loans

Car Lease Deals Negotiations

Negotiating Car Lease Deals 

Some experts have suggested that you initially not inform the dealer how you plan to finance your car — that you wait until a price has been established, then tell them that you want to lease. Don’t do it! It’s old advice and it doesn’t work well anymore.

Up front, let the salesperson know that you want to lease, that you consider yourself well informed about leasing, that you are knowledgeable about the car model you’ve selected, that you want to discuss selling price, not monthly payments, and that you are not interested in playing games.

Let the dealer know that if you can get a good fair deal, you’ll lease today. Otherwise, you’re willing to walk out and find another dealer or leasing company who will give you the deal you want.

The three key advantages you have and should use in any negotiation are:

• Your time to prepare
• Your ability to shop around
• Your ability to walk away

Prepare to Negotiate

If you’ve already done your homework, this process will be as smooth as silk. If you haven’t, the process could be long and painful, not to mention expensive.

First, you should negotiate the lease price (cap cost), having a specific target price in mind (see Know What to Pay). Don’t let them tell you that price isn’t negotiable in a lease. It’s an old trick. Unless you’re wanting a top-selling car that’s in short supply, price is always negotiable.

Since the dealer only controls selling price, don’t expect to get very far trying to negotiate residuals and money factor, which are controlled by the leasing company, for which the dealer is just acting as an agent. You can, however, ask if they work with other leasing companies who might offer better terms — or you can shop for another leasing company, bank, or credit union on your own. Or let one of the online services, such as Primelease, do the work for you, for free.

Next, you should ask about any rebates, advertised specials,  factory-to-dealer incentives, or discounts that would reduce your cap cost. Tell them what down payment, if any, you would like to make and negotiate a fair price for your trade-in (you should already know its wholesale value). Ask about any acquisition fees, disposition fees, or other charges that would affect your cost.

So You Got the Deal

Finally, ask them to calculate your monthly payment amount, less sales tax, based on all the figures that have been agreed upon. While the salesperson is gone to check with the Finance and Insurance (F&I) Manager to calculate the numbers (salespeople don’t make these kinds of  calculations), do your own calculations. When he returns, it’s very important that you check their payment figure against your own.

Make sure you’re using the same cap cost, residual, money factor, and term as the dealer is using. If there is a discrepancy, have them explain their calculations in detail, step-by-step. Often, the difference is a “mistake,” some previously unmentioned extra charge, or you weren’t given the correct credit for your trade-in.

When No Negotiations Are Required

Now that you know the essentials of negotiating a lease deal, you should also know there are times when little or no negotiating is required.

When you find good lease deals being advertised in the newspaper or on TV (see Where Are the Deals), these are packaged deals jointly sponsored by the dealer and the leasing company. These deals are usually already good deals and usually require no further negotiating. In fact, even if you wanted to, negotiating is often not possible due to the special conditions required to offer the deal. Typically, every element of the deal — lease price, term, money factor, residual, vehicle make and model — is already set and can’t be changed.

Usually these advertised deals are better than you could negotiate yourself. So, keep a sharp eye on those ads.

Negotiating Tips
Following are some important tips that may help you in your negotiations:
* Always negotiate price, never monthly payments (unless you know exactly how monthly payments are calculated)
* Always negotiate price UP from dealer’s cost, not DOWN from the sticker price
* Never let the dealer tell you that lease prices are not negotiable
* Never tell the dealer what monthly payments you can afford – give him a price instead
* Always come prepared with the dealer invoice price for the vehicle you want
* Always come knowing what your trade-in is worth
* Never let the dealer tell you your source of invoice prices is wrong
* Never, ever give the dealer a deposit on a car during negotiations
* Never give the dealer a chance to “lose” the keys to your trade-in
* Don’t sign a “purchase/lease agreement” until you’ve settled on a deal
* Never reveal your attraction to a vehicle (”I just love that car”) during negotiations
* If you’re not comfortable with the salesperson, ask for another, or leave
* Always give yourself the option of walking out if negotiations don’t go your way
* Let the dealer know up front that you are knowledgeable about leasing
* If you sense the salesperson is playing games with you, ask them to stop
* Don’t agree to extended warranties, credit insurance, or add-on services
* Always check the dealer’s monthly payment figures against your own figures
* Generally, it’s best to deal at the end of the day, at the end of the month, on a weekday, on a rainy day, or any slow period
* Never accept an offer to take a car home overnight before you’ve settled a deal
* If you become tired, confused, intimidated, or pressured during negotiations, you’re doomed
More in the Car Lease Kits

Best Car Lease Deals

Best Car Lease Deals 

What is a good car lease deal? How do you know a good deal when you see one? And where do you find deals? Being able to recognize a good deal — or a bad deal — is an important part of successful automobile leasing.

Negotiating or finding a low lease price is, of course, an essential part of a good car lease deal. But so is getting a high residual. And a low money factor. And a low acquisition fee.

It’s the combination of all of these elements that makes a lease deal. It’s possible, for example, to have a good high residual and a not-so-good lease price, and still have a good deal overall. Or a low money factor might compensate for a low residual to make a good deal. All these factors, in combination, must be taken into consideration when evaluating lease deals.

To the uninformed automotive consumer, a lease is nearly always seen as a good deal simply because the monthly payments are lower than loan payments for the same car.

This is how dealers want it, and it’s why they emphasize monthly payments, not prices. Consumers who get caught in the dealer’s lease payment game will nearly always pay too much.

You can’t simply look at monthly payments to evaluate a car lease deal. You could easily pay more than sticker price and still have what you believe are attractive monthly payments. This is the reason many people who are leasing today are overpaying, and the reason dealers love to lease.

Dealers count on a high percentage of their leases being based on full MSRP, or more — to uninformed customers who don’t know any better.

So how do you know what is a good lease deal, and what isn’t? Those leasing ads in the newspaper — are they great deals or not? The offer your dealer just made to you — is it a fair deal or rip-off? How about that car-lease TV commercial you saw last night? See our article, Understanding Car Lease Ads, for some answers.

Lease Deal Analysis

If you’re not sure what a good deal is, how will you know when you see one? How will you recognize a bad deal? How will you know what deal to ask for when you’re negotiating with your dealer?

It’s extremely important to be able to quickly determine whether a lease deal is worth considering, based on the complex interaction of cap cost, cap cost reductions, term, residuals, and money factor. For example, it is not sufficient to know that you are getting a great interest rate (money factor) — because your lease-end residual value may have been adjusted lower to compensate.

You can do the calculations and comparisons yourself, if you know how, or you can use the exclusive Lease Deal Evaluator calculator — a part of the optional Lease Kit — that enables you to easily size up any lease deal for any vehicle make and model. It’s a great tool that helps you equalize the odds in the game of leasing.
If you’re already leasing your car and want to know what kind of deal you got, the Lease Kit also has a special Lease Inspector analytical calculator especially for this purpose. Using figures right from your lease contract, it’ll tell you just how good — or bad — your deal was.

It’s one thing to know what a good deal is, it’s another to actually find one. Where are the good deals to be found?

Where are the Best Car Lease deals?

There are essentially three ways to find good car lease deals: You can pound the pavement and travel the streets visiting every dealer in town, or you can use the easier techniques described below:

* Newspaper, radio, and TV ads are a prime source for locating car lease deals, as are auto dealer’s websites. Manufacturers frequently offer special limited-time subsidized, or subvented, lease deals on some of their models. They do this by either boosting residuals or lowering interest rates (money factor), or both. Then if there are also discounts or rebates to lower the lease price … how sweet it is. If you notice in newspaper ads that all your local dealers for a particular manufacturer are offering the same or similar deals, it’s likely to be one of that manufacturer’s subvented deals, and probably worth your serious consideration. Most manufacturer-sponsored lease deals are nearly always genuinely good deals. Just make sure you can live with any restrictions that may be specified in the small print of these ads. You may also have to have an excellent credit score (700+) to actually get the deal as advertised. Check your credit score at MyFICO.com .

* Use one or more of the popular auto referral or pricing services now available on the web. We recommend InvoiceDealers, Edmunds, and Internet Pricing on a New Car You simply tell them what vehicle you want, they contact dealers in your area who have agreed to provide the best prices, and the dealers contact you to present their offers. CarsDirect is a little different in that they do most of the work for you. If you like their deal, you simply go to the dealer, sign your lease papers, and drive away. No haggling, no stress and strain. It’s best to ask for quotes from multiple companies at the same time so that you’ll have plenty of information to compare. This technique can get you the best lease deals when manufacturer subvented deals are not available for the vehicle you want.

* Check out non-dealer sources of lease financing. Most people think you have to go with the “captive” finance company used by the dealer. Not true. In fact, you can often find much better deals at independent financial companies. Unfortunately, most large banks and lending institutions don’t like dealing directly with the public. They prefer to work through dealers or brokers. Brokers work with national financial companies to find the best terms for you. They receive a small commission for sending the business, just like mortgage and insurance brokers. Just be aware that independent lease companies usually can’t compete with car manufacturers’ promotional lease deals, but do well with higher-priced luxury cars

Using these methods will get you good lease deals but it doesn’t necessarily guarantee that you’ll get the best deal possible. A little negotiating and haggling may still be required if you want a better deal. Read the next topic, Negotiating Deals, for some suggested negotiating tactics and our Car Lease Kits

Get Car Lease Preparation

Get Car Lease Preparation

Preparation is the key to successful car leasing and getting good deals. It’s estimated that as many as 85% of all automotive consumers never do any homework prior to visiting a dealer to buy or lease. Making a small investment in research will return big benefits in the end. To not do so means you’re at the mercy of the dealer, who is already well prepared. Remember, he does this every day for a living; you only do it every few years when you have to.

Know the Vehicle You Want to Lease

You should know exactly what vehicle you want and everything about it — features, styles, optional equipment — before you visit your dealer to lease. Try to know as much about it as the dealer’s salespeople.

Choosing the right vehicle can make a significant difference in monthly lease payments. See the Lease Kit for lease ratings for all vehicle makes and models.

Vehicles that have a history of high resale values and, therefore, high lease residuals make the best lease deals. Be wary of models that have had large numbers of recalls or safety problems. And don’t choose models that drastically change styles every year; they typically don’t hold their value very well and are more expensive to lease.

It’s also good to know something about the market conditions for the models you’re interested in. What’s the supply? How’s it been selling? For how much? What are the plans for the future? These are all factors that have an impact on the kind of deal you can get.

How Much to Pay

Everyone should know that you don’t pay full list price when buying or leasing a car — unless the car is a very hot seller that is in short supply — or if you’re among the one out of every seven people in the U.S. who don’t know that car prices are negotiable.

The key to knowing what to pay for a new car is knowing the factory invoice price. This is the price dealers pay the manufacturer for a vehicle. See the Resource Guide for links to pricing guides on the Web.

The difference between factory invoice and MSRP (Manufacturer’s Suggested Retail Price) is the dealer’s potential profit margin — and your bargaining range. Depending on the vehicle, this margin can be as little as 4% or as much as 16%, or more, of the sticker price. You won’t get very far asking a dealer for a 8% discount on a car on which he can only make 6% maximum profit, even if he sells at full sticker price.

The Lease Kit provides Dealer Profit Margins for all vehicle makes and models so that you can conveniently determine, at a glance, which vehicles have the most bargaining room. Generally, you’ll be able to get a better deal on a $20,000 car with a 10% margin than another brand, same price, with only a 6% margin.

Savvy automotive consumers always deal from the invoice price up, not from sticker price down. So, how much over invoice is a good fair price to offer the dealer?

It’s impossible to create a hard-and-fast set of rules because of supply-and-demand variation and margin differences, but the consensus of opinion, for vehicles in good supply and average demand, seems to be the following:

* For vehicles with MSRPs up to $25,000, $300 to $500 over invoice is a fair offer. Expect to end up paying more if the dealer decides to do some hard bargaining.

* For higher priced vehicles, up to $40,000 MSRP, $500 to $1000 over invoice would be a reasonable offer, more if the dealer digs in his heels.

* For MSRPs higher than $40,000, expect to pay at least $2000 to $3000 over invoice.

It’s possible to find even better deals, in which you actually pay less than invoice. Dealers are often able to do this and still make a profit due to holdbacks and factory-to-dealer rebates which are special incentive payments made to the dealer by the manufacturer to help promote sales.

Know Where to Get Discounted Prices for your Car Lease

Most people don’t like to negotiate with car dealers, and in many cases it’s not necessary. The Internet allows you to “test” dealer prices without actually talking to a salesperson.

Here’s how.

One of the easiest methods of “testing” dealers to find out how much they are willing to discount prices on specific vehicles is to use one or more of the free online car pricing services, such as InvoiceDealers and Edmunds. Get quotes from multiple services so that you have prices to compare.

Go to each service and specify which vehicle you’re interested in, and they’ll give you price quotes from dealers in your area. The prices you get back might not be the absolute lowest that you could possibly negotiate for yourself (if you’re really good), but it’ll give you a good notion of what you can expect to pay. And if you like one of the prices, you’ve just saved yourself a lot of work. Just go to the dealer, sign your lease or loan papers, and drive away.

See Car Pricing Secrets - What Dealers Won’t Explain to You for more details on this topic.

Know How Much You Can Afford for Car Lease

Now that you know that vehicle price is key to leasing, and how to negotiate or find a great price, how do you know what price you can afford? Most people know how much they can afford to pay as a monthly payment but don’t know how to translate that into a vehicle price. Our Affordability Calculator, a feature of our Lease Kit, can tell you. You tell it how much you can afford to pay monthly, and it’ll then tell you the maximum vehicle price you should be aiming for.

In summary, know your car, know your prices, know what you can afford, and know how leasing works before you set foot in the dealer’s showroom. Now, read the next topic, “Finding Good Lease Deals.”

Learn more about Car Lease Kits 

Car Lease Terms Contracts

Car Lease Terms Contracts 

Auto lease contracts, or “lease agreements,” are all slightly different in detail, but contain important common elements that should become familiar to you. In fact, you should pick up a blank contract form from your dealer before you actually plan to lease to allow yourself plenty of time to examine it. Seeing a contract for the first time as you’re sitting under the hot lights in the dealer finance manager’s office is not the ideal time to study it.

Our Lease Kit contains a sample car lease contract form, each section of which is explained in detail.

Let’s look at some of the elements of a typical auto lease contract.

Disclosure Statement
Regulation M
In January 1998, the Federal Consumer Leasing Act, Regulation M, was revised to require that certain key information and figures are in every lease contract. It required that Capitalized Cost, Capitalized Cost Reduction, Residual Value, Lease Charges, Monthly Payments, and other amounts be clearly spelled out. It also required that this information be displayed in a uniform way, and using  standard terminology (although still not simple English). Note that Regulation M did not require that interest rate or money factor be disclosed, although it did require disclosure of total finance charges.

Federal law requires that lease contracts contain a section in which certain facts and figures are disclosed to you. This section in your contract is often titled, “FEDERAL CONSUMER LEASING ACT DISCLOSURES.” The following sections are among those required:

o Amount due at signing
o Monthly payment
o Other charges
o Total of payments
o Amount due at lease signing
o How monthly payment is determined
o Early termination statement
o Wear and tear explanation

Although the new regulations certainly go a long way in the right direction, there is still much room for improvement. For example, the changes do not regulate the actual figures in the contract, such as the amount you are credited for your trade-in, the vehicle’s price, the finance fee, or whether the monthly payment figure was even calculated correctly.

You would be surprised at the number of lease contracts that have mistakes in them — either legitimate or intended.

You must be able to catch and correct problems before you sign your contract. Afterwards is too late.

There is no 3-day “right to cancel” or “cooling off period” law for automobile purchases or leases, as many people mistakenly believe. This is why it is important that you read your contract and be able to verify the monthly payment figures yourself, before signing.
Our Lease Kit includes a sample lease contract with easy to understand explanations, an itemized contract checklist, Lease Inspector calculator, and payment worksheets to help you make sure your contract is correct before you sign.

Insurance

Most auto lease agreements require you to maintain insurance coverage: bodily injury or death liability: $100,000 per person / $300,000 per occurrence, property damage liability: $50,000, comprehensive and collision for actual value with no more than $500 deductible.In Canada, $1,000,000 in liability coverage is required.

While this may be more coverage than you might buy normally, it’s always smart to have maximum protection in these times of expensive repairs and huge lawsuits, regardless of whether you’re leasing or buying. For more details, read our article, Auto Insurance and Leasing.

Excessive Wear and Tear

Leasing contracts specify that you must return the car at lease-end with no more than “normal” wear and tear. Most new contracts do a pretty good job of spelling out exactly what “normal” means. Basically, it means you have to take reasonably good care of the car and keep it maintained.

It’s interesting that this is the part of the leasing contract that is most responsible for “leasing phobia” with many first-time leasers, and causes some people to decide not to lease. These people have a tremendous unfounded fear that, when they return the car, the leasing company will examine it with a fine-tooth comb and penalize them thousands of dollars for minor dings and scrapes.

Of course, if you actually have significant damage, seriously worn tires, and deep scratches, you should get them repaired before your return the car — or pay after you return the car.

Excessive Mileage

Leasing agreements specify the maximum average annual mileage you’re allowed without paying a penalty. The most common mileage limit is 15,000 miles per year, although 10,000 or 12,000 miles are often used.

Make sure that when you lease, you select the limit that best fits your driving needs because the penalty at lease-end for exceeding the limit can be expensive — typically in the range of $0.10-$0.25 per mile.

For Canadians, the Kilometer Allowance is most often 24,000 km. Excessive Kilometre charges vary as in the U.S.

Early Termination

Lease contracts spell out the conditions under which the contract may be terminated, by either party. Some lease companies do not allow termination in the first few months or last few months of the lease. The way in which an early termination is handled varies by lease company. Costs can also vary depending on the method used to calculate remaining lease balance.

Terminating a lease contract early can be very costly, and should be avoided if at all possible. As stated before, this is the part of leasing that gets the most people in trouble.

If you’re already in a lease and need to end it early, there are options available to you that may allow you to eliminate or minimize your early termination costs. See the Lease Kit for details and instructions on choosing the right option.

Destroyed or Stolen Vehicle

Having your leased vehicle totally destroyed or stolen is a form of early termination and, unless you have gap protection, you are exposed to the same penalties and payments as described above. Gap protection, sometimes called gap insurance, covers any additional amount that you might owe after your insurance company pays off.

Gap coverage is included in most modern lease contracts. In a few, it’s offered as an option — for a fee.

If your lease contract doesn’t automatically provide gap coverage, and it isn’t offered by your dealer, check with your auto insurance company or bank.

Gap coverage is very important and is strongly recommended. Read the fine print in your contract to find out what protection you may already have, or don’t have. In your contract, this protection may be called a waiver.

What is NOT in Your Car Lease Term Contract

Lease contracts do not show you the interest rate (money factor) you are paying. However, it is required that you be shown total finance charges (”rent charge”) — but not the rate that results in those charges.

You may not be shown the lease acquisition fee (see Lease Fees and Taxes) as a separate line item in your lease contract. The fee is typically added to the cost of the vehicle and shown as part of the Net Cap Cost.

The Car Lease Kit contains a sample car lease contract form, each section of which is explained in detail.

Car Lease Price Fees and Taxes

 Car Lease Price Fees and Taxes

In car leasing, as in buying, there can be charges, fees, and taxes that often surprise newcomers. Fees can differ by dealer, leasing company, and by the state in which you lease. The same charge or fee can sometimes have different names in different lease contracts. Some of the fees charged in leasing are the same as the fees charged when buying.

Let’s take a look at the most common types of car lease charges, fees, and taxes:

First Payment
A lease is different than a loan in that payments are made at the beginning of the month in which they’re due, while loan payments are paid at the end of the due month. This means you make your first lease payment in cash at the time you sign your lease contract. The first payment is NOT considered a down payment or a security deposit — it is actually your first monthly payment on your lease.

Security Deposit
A fee that is usually about the same as, or a little more, than your monthly payment. It will be refunded to you at lease-end, less any disposition, mileage, or damage charges. If you have a good credit rating you may not have to make a security deposit. Many leases require no security deposit. Making a security deposit is not the same as a down payment, which you don’t get back at the end of your lease. Some lease companies offer a lower lease finance rate in exchange for a large security deposit.

Acquisition Fee (Bank Fee)
An acquisition fee, sometimes called a “bank fee,” is an administration fee charged by the leasing company, much like points on a mortgage. This fee is usually not explicitly specified in your contract, but is included in your Cap Cost when calculating monthly payments. You should ask about it if you don’t see it mentioned. This fee is typically in the range of $250 to $900, depending on the lease company. High-end luxury vehicles have higher acquisition fees. Although this fee is set by the lease company, it is becoming more common for dealers to “bump” this fee to add a little extra profit for themselves. If you feel this fee has been “bumped” by the dealer, you can attempt to negotiate it down. Otherwise, acquisition fees are not negotiable.

Disposition Fee
A typical fee, set by the lease company, that is due at the end of the lease to compensate the leasing company for the expenses of selling or otherwise disposing of a vehicle. Some leasing companies might also require this fee even if you decide to purchase your vehicle at the end of the lease. In this case, try to negotiate it out of the deal. $250 to $450 is typical for this fee, if the fee is charged at all. Some lease companies do not charge a disposition fee.

Tax on Down Payment
If you make a down payment (capitalized cost reduction) on your lease, you will be charged state and local sales tax on the down payment amount in most states and in Canada. It is payable at the time you sign your lease contract.

In some states, such as Texas and Illinois, you must pay the entire sales tax up front, either on the sum of all lease payments or on the full sale price of the vehicle, depending on the state. Often this amount is folded back into the capitalized cost and financed with the lease. See below for more details.

Documentation, Registration, License, Tag, and Title Fees
These are the same fees you would normally expect to pay in your state, whether you lease or buy your new car. Some of these fees are not official fees but are often given official-sounding names, and are actually extra dealer profit. It’s often difficult to determine which are official and which are not.

Documentation fees are typically charged by dealers as a kind of administrative fee. The fee amount ranges from about $250 to $600, much of which is simply added profit for the dealer. Many dealers have the fee pre-printed on the sales form to make it seem official. Some dealers are willing to reduce or waive documentation fees, and others simply refuse to as a matter of policy.

Tag and registration fees are official fees required by state and local governments. Dealer simply collect the fees, without markup, and pass them along to the appropriate government agencies.

When are fees and taxes paid?
When a lease contract is signed, there are certain fees, taxes, and charges due as up front cash. These include the first month’s payment, any down payment, sales tax on the down payment, any security deposit, and official state/county license/tag/registration fees.

The total of all these fees are usually called “lease inception” fees, or “drive out” costs.

Notice that any down payment is only a part of the total lease inception amount. This sometimes confuses leasing consumers who mistakenly think of the total inception amount as a down payment. See the following article for more details: Lease Down Payment.

Tag and registration fees are usually collected as up-front cash.

Other fees such as doc fees and admin fees can either be paid up front or included in the capitalized cost.

The acquisition fee is included in the capitalized cost and is financed along with the lease. It is not typically paid up front in cash, although it might be for some leases.

The disposition fee is collected at the end of the lease when a vehicle is returned to the lease company and, in some cases, when the vehicle is purchased. Some states charge sales tax on the disposition fee.

Security deposits are returned by the lease company at the end of a lease.
Sales Taxes
U.S. states (except New Hampshire, Alaska, and Oregon) and Canada impose a sales tax on motor vehicle purchases by consumers. In the case of leasing, the leasing company passes the sales tax along to you, the lessee. However, the way it’s done can be quite different from state to state, even region to region.

The most common method is to tax the monthly lease payment at the local sales tax rate. This means you only pay tax on the part of the car you lease, not the entire value of the car. For example, if your local sales tax rate is 5%, simply multiply your monthly lease payment by 5% and add it to the payment amount to get your total payment figure.

As a side note, with this method you are paying sales tax not only on the depreciation amount of your payment, which is fair, but you’re also paying tax on the finance charges, which is not so fair. In no other type of business transaction do we pay sales tax on interest or finance charges. This is an area for improved state tax legislation.

Canadians pay sales tax (PST + GST) only on monthly payments, as in most of the U.S.

In some states, such as Ohio, you pay sales tax up front on the capitalized lease cost. In other states, such as Illinois and Texas (see Texas Auto Leasing), you actually pay sales tax on the full value of the leased car, not just the leased value, just as if you were buying it. In Illinois, you can also pay monthly taxes. In a few states, such as New Jersey, you have a choice of paying up-front taxes on either the full purchase price or the total of lease payments. In New York, you pay tax up-front on the sum of lease payments. Some states tax fees and taxes; others don’t. Most states tax the lease acquisition fee; a few don’t. Some states, have a cap on the total amount of taxes paid. Some allow a tax credit for trade-in vehicles, others do not.

Before you lease, you should ask your dealer or your state taxing authority how sales taxes are applied, and by how much, in your area. Tax laws change frequently.

Generally, you pay sales taxes for the locality in which you live, not for the locality in which the car dealer has his showroom. If you move to a new location at any time during your lease, your taxes will probably change and, in some cases, require a cash payment. If you plan to move soon, contact the taxing agency in the state to which you’ll be moving to determine how it will affect you and your lease.

More information at Car Lease Guides 

Car Lease Finance - Monthly Lease Payments

 Car Lease Finance - Monthly Lease Payments

We’ve already discussed the separate factors that contribute to the cost of car leasing: net cap cost, cap cost reductions, residual, money factor, and term  (see How Leasing Works).  Now, let’s put it all together and see exactly how your monthly lease payment is determined.

The “secret” lease payment formula described below is used by dealers and leasing companies, who would prefer that you not know about it. Even federal leasing regulations do not require that leasing companies actually disclose how your payment is calculated. It doesn’t appear anywhere on a car lease contract form.

The result is that the vast majority of people who lease do not know how to check the math on their lease contract and cannot detect the existence of simple errors, intentional “mistakes”, or out-and-out fraud.

Lack of knowledge of how lease payments are calculated is one of the key reasons that consumers overpay on car leases today.

Importance of Lease Payment Calculation

Let’s establish why it’s so important to know how to calculate monthly lease payments. Consider the following:

* If the dealer figures your lease payment based on full sticker price rather than the discounted price you negotiated with him, how will you know?
* If the dealer doesn’t give you proper credit for your trade-in, even though it’s in your contract, how will you know?
* If the dealer adds hidden charges and fees to your lease without mentioning them or showing them in your contract, how will you know?
* If the dealer mistakenly “drops” a zero and gives you credit for only $100 of a $1000 rebate, even though your contract shows the $1000 rebate, how will you know?
* If the dealer “bumps” the interest rate (money factor) that he has quoted you (money factor is not shown in lease contracts), how will you know?

Remember, all you see is a “bottom-line” monthly payment figure, after the calculations have been done by the dealer. Therefore, you must be able to check a dealer’s lease payment figures to make sure there are no “mistakes,” intentional or otherwise.

If your payment figures and the dealer’s don’t agree, the only possible reason is that he’s using a different set of numbers for cap cost, residual, money factor, or term than the numbers he’s given you. Ask him to give you exactly the numbers he’s using — and you should be able to exactly match his results.

Let’s now look at the formula. If you don’t particularly like math, our Lease Kit provides easy to use payment tables that can be printed and used in place of the formula. The printed tables can be carried with you to the dealer’s showroom so that you don’t need to remember how to do the math there.

Monthly Lease Payment Formula

A lease payment is made up of three parts: a depreciation fee, a finance fee, and sales tax — all added together. We’ll look at the first two parts of the formula below. Sales tax is covered a little later.

Depreciation Fee

The depreciation fee portion of your payment simply pays the leasing company for the loss in value of its car, spread over the lease term (number of months), based on the miles you intend to drive and the time you intend to keep the car. You pay off an equal portion of the total expected depreciation each month. This is calculated as follows:

Depreciation Fee = ( Net Cap Cost – Residual ) ÷ Term

Remember, Net Cap Cost is the Gross Cap Cost (selling price you negotiate with the dealer) plus any add-on fees and taxes, and any prior loan balances, minus any Cap Cost Reductions (down payment, trade-in, or rebates). A good lease deal is when you have the lowest possible Net Cap Cost with the highest possible Residual.

Car Lease Finance Fee

The finance fee portion of your monthly lease payment is like interest on a loan and pays the leasing company for the use of their money. It’s calculated as follows:

Finance Fee = ( Net Cap Cost + Residual ) × Money Factor

Yes, you add Net Cap Cost and Residual — this is not a mistake. It’s not double-counting as it may appear. It’s simply a way of calculating the average amount financed without using complicated constant-yield annuity business formulas (for more details, click here).

Also be aware that you’re paying finance charges on both the depreciation and residual (the total of which is the negotiated selling price of the car). Remember, you’re tying up the leasing company’s money while you’re driving their car. Technically, you’re paying finance charges on half the depreciation and all of the residual for the term of the lease.

You won’t find your Monthly Finance Fee or Money Factor shown in your lease contract. It’s not required by law. Rather, they only show you a “Lease Charge” or “Rent Charge,” which is the sum of all your monthly Finance Fees over the entire term of your lease. So, to find your Monthly Finance Fee when you only know your “Lease Charge” or “Rent Charge” use the following formula:

Monthly Finance Fee = Lease Charge ÷ Term

— or —

If you know your “Lease Charge” or “Rent Charge” from your lease contract and you want to know your Money Factor, use the following formula:

Money Factor = Lease Charge ÷ ( (Net Cap Cost + Residual) x Term )

— then —

To convert Money Factor to APR Interest Rate, use the following formula:

Interest Rate = Money Factor x 2400

Total Monthly Payment

Now, add the Depreciation Fee and the Finance Fee that you calculated above to get your Total Monthly Payment.

Sales tax must also be added in most states, but we’ll hold that discussion until later.

Total Monthly Payment = Depreciation Fee + Finance Fee

Note: Ford Motor Credit (FMC) uses a slightly different, more complex formula than the rest of the world, which results in slightly higher payments — typically 2%-3% higher than the figure you get using the conventional formula above.

Example Calculation Using the Leasing Formula

So now that we’ve looked at the formula, let’s see how it actually works.

Let’s assume you’ve decided on 3-year (36 month term) lease of a Toyota Camry XLE that has a sticker price of $24,600 (MSRP).

You’ve managed to negotiate the price down to $23,000 (Cap Cost). You decide not to make a down payment, but you have a trade-in worth $5000. Your Net Cap Cost is therefore $23,000 - $5000 = $18,000.

Now, the dealer tells you (because you asked) that the Money Factor is .00375 (.00375 x 2400 = 9.0%) and the Residual Percentage is 60% of MSRP. So your Residual amount, in dollars, is .60 x $24,600 = $14,760.

Now let’s do the math:

Depreciation Fee = ( $18,000 – $14,760 ) ÷ 36 = $90.00

Finance Fee = ( $18,000 + $14,760 ) × .00375 = $122.85

—

Monthly Lease Payment = $90.00 + $122.85 = $212.85
(sales tax not included)

If you’re not comfortable with performing this math, especially in the heat of a dealer’s showroom, you can use the easy Payment Tables contained in our optional Lease Kit. Or if you’ve already leased and need to know if your deal was fair and honest, use the Lease Inspector in the Lease Kit.

Or you can use our Lease Payment Calculator to calculate payments. Or use our Lease vs Buy Calculator to compare lease versus loan costs at Car Lease Kit

Car Lease Terms

Car Lease Terms - How Car Leasing Works

Automobile leasing is based entirely on the concept that you pay for the amount by which a vehicle’s value depreciates during the time you’re driving it. Depreciation is the difference between a vehicle’s original value and its value at lease-end (residual value), and is the primary factor that determines the cost of leasing.

If you consider two different cars, both costing $20,000 when new, where one is worth $15,000 after two years and the other worth only $12,000, the first car will cost less to lease because of its smaller depreciation amount.

Different makes and models of vehicles can have dramatically different depreciation rates. Those vehicles having the lowest depreciation make the best lease deals.

Generally, European and Japanese makes have lower depreciation than American brands. Honda, Toyota, and Volkswagen have consistently held low depreciation ratings, as has Mercedes, Lexus, and other luxury brands. See our Lease Kit for lease ratings on all makes/models vehicles, based on expected depreciation values.

Let’s take a look at MSRP and residual value, as well as the other components of leasing — capitalized cost reduction, money factor and lease term — to understand how leasing works.

Manufacturer’s Suggested Retail Price - MSRP

MSRP is the full price for a vehicle as displayed on its window sticker, including optional packages and destination charges. Dealer fees are not considered part of MSRP, although these charges are part of the overall cost of the vehicle.

Dealers will usually agree to discount the sticker price if you ask — and you are willing to haggle for it — unless the vehicle is in hot demand and low supply. See Car Price Secrets - What Dealers Won’t Tell You for more details.
Capitalized Cost

When you and your dealer sit down and agree on a price for a leased car, this becomes the capitalized cost, or “cap cost.” In a good lease deal, the cap cost will be significantly less than MSRP. Cap cost is sometimes called lease price.

Because this is where dealers make their profit, they will sometimes imply, or possibly state outright, that price isn’t negotiable in a lease, and that somehow leases are different because you aren’t buying the car. This is simply not true.

It’s in your best interest to always negotiate the lowest capitalized cost possible — a discount off the sticker price — just as if you were buying. The lower your cap cost, the lower your monthly lease payments will be.

Capitalized cost may also include certain fees, such as an acquisition fee (similar to mortgage  “points” , or loan origination fee). Acquisition fees are typically not specified in lease contracts, so it’s not readily apparent that you are paying them in your capitalized cost.

If you haven’t fully paid off the vehicle you’re trading, cap cost would also include any remaining loan balance (”negative equity”) after trade-in credit is applied (this is not a good practice if you can avoid it).

Capitalized Cost Reduction

Capitalized cost (lease price) can be reduced by rebates, factory-to-dealer incentives, trade-in credit, or a cash down payment. These are known as cap cost reductions. Even modest cap cost reductions, such as a down payment, can create significantly smaller monthly lease payments, especially in shorter leases.

When you subtract cap cost reductions from cap cost, you get net capitalized cost, sometimes called adjusted cap cost.

Residual Value
How Residuals Affect Your Monthly Payment

Assuming a typical lease ($22,000 cap cost, 36 months. 8% interest), drag the bar below to see how changing the residual value affects monthly payment.

Notice if the residual is set to zero, the payment is about the same as purchasing the vehicle with a loan. Moving the bar up then shows you the benefit of residuals when leasing.

The wholesale worth of a car at the end of its lease term, after it has depreciated, is called its residual value. The higher the residual value, the more the car is worth at lease-end — and the lower your lease payments.

Since nobody can truly predict the future, residuals are only educated guesses based on historical resale-value data for specific automobile makes and models.

Leasing companies subscribe to services that provide this kind of industry data, and then use it to set their own residual numbers.

Car manufacturers’ leasing companies often temporarily boost residuals on slow selling vehicles so that they can offer better lease deals. These are called subvented deals.

Residuals are usually stated as a percentage of MSRP. A 36-month, 50% residual on a new $20,000 car means that its estimated depreciated value at the end of a 3 year lease will be $10,000. The actual value at the end of 36 months might be higher or lower. (The Lease Kit contains estimated residuals for all current auto makes and models).

Residual percentages decrease as the length of a lease, called the lease term, increases. This is because the older a vehicle gets, the less it’s worth.

For example, the 24-month residual on a particular car might be 57%, decreasing to 50% for 36 months, then to 44% for 48 months, and 39% for 60 months.

Residuals fall rapidly in the first 24 months, then more slowly in later months. This is why shorter term leases are more expensive than longer leases.

The best cars to lease are those whose 24-month residuals are at least 50% of their original MSRP value.

Remember, the higher the residual, the lower the lease payments. This is not to say that cars with lower residuals cannot be good lease deals, it’s just that you get more car for your dollar with the high-residual models.

Lease companies often artificially raise residual values on particular vehicles to make leasing more attractive. (See the Lease Kit for lease ratings on all vehicle makes and models). Generally, residuals set by car manufacturers’ finance companies (Ford Motor Credit, GMAC, American Honda, and others) are higher than industry averages to help promote lower lease payments.

Money Factor

When you lease, you’re tying up the leasing company’s money while you’re driving their car. Remember, they spent their money to buy your car from the dealer so that they could lease it to you. They rightfully expect you to pay interest on that money, the same as with a loan.

This interest is expressed as a money factor, sometimes called lease factor, lease rate, or simply factor, and is specified as a small decimal number such as .00297. (Note: dealers will sometimes confuse you by quoting money factor as a larger decimal, such as 2.97, which means .00297, because it sounds like an attractively low annual interest rate.)

Money factors can be converted to annual interest rate (APR) by multiplying by 2400 (Yes, it is always 2400 and is not related to the length of the loan in months). For example, a money factor of .00297 multiplied by 2400 = 7.13%.

Try converting interest to money factor, or money factor to interest, in the Converter Calculator below.

A good rule of thumb: Lease money factors, converted to APR, should be comparable to, if not lower than local new-car loan interest rates. Like interest on a loan, the lower the money factor, the lower your monthly lease payments.

Some recent manufacturers’ lease deals have offered lease rates as low as .000625 (1.5% APR), or lower. However, you may not qualify for these great money factors unless if you have a spotless, or near spotless, credit rating. Credit requirements for leasing are somewhat more strict than for purchase loans because of higher risks to the financial company.

If your credit history is flawed, even if it’s a mistake, you’ll pay a higher interest rate — or not be able to lease at all. It’s always advisable to know your credit report and FICO score (see MyFICO.com ) before visiting your dealer. If you spot problems, get them resolved with the credit reporting agency as soon as possible.

Note that money factor and interest rate is not required to be shown in lease contracts. So, if you want to know your lease rate, you’ll have to ask — or you can calculate it using the Lease Inspector in our Lease Kit.

Lease Term

Lease term is the length of time a car is leased, usually expressed in number of months. Typical leases are 24, 36, or 48 months, although “oddball” terms, such as 30, 39, and 42 months are frequently seen in lease promotional ads. These odd lease terms are generally designed to have your lease end and get you back into the showroom during a slow sales period.

Although longer leases produce somewhat lower monthly payments (see interactive graphic at right), it may be smarter to choose a shorter lease term. Here’s why.

Choose a lease term that’s no longer than the general coverage warranty that comes with your vehicle. That way, you’re covered for the entire duration of the lease if something breaks. For example, if a vehicle’s “bumper-to-bumper” warranty is 36 months, don’t lease for longer than 36 months.

Many major vehicle problems start in the fourth or fifth year. For this reason, 60 month leases, which are declining in popularity, are not recommended except for those few makes that have unusually long warranties (Hyundai: 5 years).

more information in The Car Lease Kit

Next Page »