Frequently Asked Leasing Questions

Answers To Frequently Asked Leasing Questions:

Why are lease payments lower than purchase payments? - Lease payments are based on a smaller total than loan payments.  Your monthly payments are lower than buying the car, as you are only paying depreciation and interest on the car, but at the end of the lease you still do not own it.  If you had bought the car, you would have some equity when the last payment was made.

Who owns a leased vehicle? - When you lease a car, the dealer sells the car to the leasing company and they lease (or rent) you their car for the term of the lease.

Do Dealer Holdback Incentives Apply To A Lease? - Yes, they do.  Manufacturers pay a hidden financial incentive called a holdback to their dealers when a new vehicle is sold.  Holdbacks are paid out whether the vehicle is leased, financed, or bought with cash.  The amount is based on the MSRP (retail invoice) and averages between 2% and 3%, depending on the manufacturer.  Holdbacks ensure that dealers in competitive markets who are forced to offer vehicles for "dealer invoice" still make a small profit. (Note: not all manufacturers pay their dealers a holdback, so make sure to check if your dealer is getting the holdback before negotiating a price on your leased vehicle.)  High-volume dealerships qualify for additional manufacturer discounts (in addition to holdback incentives), and are usually willing to sell vehicles at or near invoice.

Does The Selling Price of the Vehicle Affect My Lease Payment? - Salespeople will tell you "the selling price of the vehicle is not important if you lease."  Not the case.  The lower the cost of the vehicle, the lower the gross capital cost is to the leasing company.  Your lease payment is determined by the difference between the vehicle's residual value and the selling price.  So a lower gross capital cost means a lower monthly payment for you, regardless of depreciation. You must negotiate the selling price on a lease,  just as if you were purchasing the vehicle.

Does Depreciation Affect My Lease Payment? - It's common to find two different vehicles with the same selling price but with substantially different leases.  (Make sure you compare leases with the same terms, as leases with different terms should have different payments.)  Just as the selling price affects your lease payments, depreciation plays an equally important role.  A vehicle that depreciates at $100 per month will have a lower monthly payment than one depreciating at $150 per month.  Picking a slowly devaluating car is critical to obtaining both a good rate and a superior lease.  Lower depreciation leads to a higher residual value, which means a lower monthly payment for you.

What About Factory-Subsidized Leases? - Factory-subsidized leases reduce the cost of leasing a vehicle the same way factory rebates do.  Subsidized leases may apply a rebate to the residual value of the vehicle, like a normal factory rebate, or may contribute cash to lower the lease's money factor.  Check out current manufacturer's leasing subsidies at Edmunds.

Leasing Terms Summarized:

Capitalized Cost: Everything with a dollar value covered by the lease; the amount to be financed. Capitalized Cost = Vehicle Price + Fees + Taxes. 

Capitalized Cost Reduction (aka Cap Reduction): A down payment used to reduce your capitalized cost.

Disposition Fees (Termination Charges):  Fees charged at the end of leases, covering turn-in, removal, and auction expenses.  

Gap Insurance: Covers situations where you end up owing more on the lease than the car is worth, in the event of a catastrophe such as a theft or total loss of the car.  See Insurance.

Inception Fee (Acquisition Charge): A charge for filling out and processing your lease paperwork (should be between $100 and $200).

Money Factor: A number used to calculate the interest portion of the monthly payment.  Money factors look like .0033.  Multiply that number by 2400 to get the true APR.  In this case, it is 8%. 

Residual Value:  The anticipated market value of the vehicle (what it can be sold for when it is returned) at the end of the lease, as determined by the leasing company.  Capitalized Cost minus Depreciation = Residual Value 

Term: The length of the lease in months. 

Leasing Pitfalls To Be Aware Of are on the next page>

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