SHOULD I LEASE A VEHICLE?
I get this question all the time from my clients about whether it makes sense to lease a vehicle or buy a used vehicle. I decided to address this issue this week on CoolCarGuy.com and give the pro’s and con’s to both since there is so much misinformation on the Internet about this topic. Especially, from the famous “financial guru’s” who for the most part know nothing about the automotive industry other than that they drive a personal vehicle themselves. However, if you structure a lease wrong it can be a bit like Alice in Wonderland doing business with the Red Queen.
First of all, a lease is nothing more than a way to drive a vehicle for less money by paying for the “depreciation” that the leasing company believes is going to take place on the vehicle. That’s it. What does this mean? It’s pretty simple actually. When you drive a new or a used vehicle off of the lot, it immediately starts to depreciate. This is the only industry that I know of where a “third-party” in the way of Kelly Blue Book, NADA or a number of other “experts” determines that your product is going down in value each month, but that can benefit you with a lease since you’re paying for that depreciation.
The computer I’m typing this on is a Toshiba laptop that I bought a few years ago and at the time it was “state of the art”, but today who knows what it’s worth. It’s depreciated down to next to nothing, it’s like a paper weight on my desk, but I can’t pull up the “book value” of this computer model this month and see what it’s worth. You can do that with an automobile though and it’s needed for banks to put a value on a vehicle they are going to loan money on.
The real reason why these automotive value based books exist is not so that you as a consumer can know what a car is worth. You may think that’s the case, but they really exist for the banks and lending institutions. It’s so that a bank, leasing company or credit union doesn’t get burned loaning money on a vehicle that they haven’t had a professional appraisal done on, like you have to have done when buying a home, a business or other types of real estate.
What does this have to do with leasing? Everything! There are a number of components involved to leasing a vehicle:
- The retail price.
- The capitalization cost
- The money factor
- The residual value.
- The miles per year.
- Your credit rating.
All of these factors come into play when leasing a vehicle and you have to watch out because you can get stung on a lease the same as you can on a purchase.
WHAT ABOUT THE MONTHLY PAYMENT?
Miles are what cause a vehicle to depreciate the most, which is why you see so many vehicles advertised on television with a low payment showing the fine print at the bottom of the screen. If you look closely you will discover that you have to put a huge chunk of change down on the lease they are advertising and then they are basing the payment on as little as 10,000 a year! 12,000 miles a year is usually the standard and some manufacturers and leasing companies even put 15,000 miles as the standard, but many of the ads are showing 10,000 miles a year for that really low monthly payment. This is because if someone puts on 30,000 miles in three years, the car is worth more than if they put on 45,000 miles in three years.
Used Vehicles Leases: The benefit of a lease is that you are only paying for the depreciation of the vehicle and not for the full amount of the car or truck you’re driving. If you lease a low mileage vehicle that already has a great deal of depreciation that has taken place and may still be under warranty, you can really save some money depending on the vehicle and the lease structure. I expect that at least 30 people will contact me this year about how to do a Used Vehicle Lease, since few people really know how to structure them and most dealerships won’t touch them. A used vehicle lease can give you equity at the end of the lease term compared to a new vehicle lease and they are simple interest leases that also come with GAP insurance.
Manufacturer Leases: There are some great manufacturer leases and there are some nightmares! I recently looked at a lease for a client of a high-line SUV vehicle, which I won’t say what the company is here, but their lease was terrible. The money factor was high, even though my client thought it was low and the residual was terrible. I was able to structure a lease through a third-party leasing company for her new vehicle and save my client, get this, $5,750 over the three years she was leasing the vehicle. That’s $159.72 a month over three years, which many people do not investigate what their total cost of leasing is for a vehicle. The manufacturer still sold a new vehicle, but we structured it to favor my client, rather than the new car leasing company. Keep in mind too that many new car leases are actually pushed through third-party banks anyway.
Auction Vehicles: Each year I have quite a number of clients who contact me about having me find them a vehicle through the Dealer Auction. Last year, I was able to get a number of great vehicles here in Colorado and around the country from Dealer Only Auctions and ship them in for my clients and save them thousands of dollars. This can work great for certain vehicles that are selling for too much money in this market. I recently saved a client thousands of dollars on a 2010 Mercedes-Benz ML350 that was still under the MB warranty with great options and miles. This is something unique to The Cool Car Guy experience since most Auto Brokers and Car Dealers are not experienced in this type of service. Auto Buying Agents do not have access to dealer auctions by the way, which is one difference between a Auto Buying Service and a Car Dealership. They have to get the vehicle from a car dealer rather than going directly to the auctions for additional savings.
Financing, Special Financing And Refinancing: Last year, I had several people contact me who had credit challenges. One client of mine filed bankruptcy two years ago and couldn’t get financed through VW, Nissan or a number of other dealerships. I was able to lease him a brand new Toyota through a special program I knew about at a price that fit his budget. He told me that he used to work in accounting for a dealership that worked with people with bad credit and he saw how bad these people got ripped off with super high interest rate loans. It’s all about the structure and relationships and knowing how to do what others can’t do.
Another client had found the car of his dreams on Craigslist and he couldn’t get the financing done on his own, while trying to buy it from a private party hundreds of miles away. He asked me to assist him, so we marked the vehicle up to compensate me for my time and I arranged to have him pick the vehicle up at a dealership on the other side of Colorado, even though it was being sold by a Private Party.
The bottom line is that leases can be a great option for people, if they know what they are doing with the proper structure. You can get burned with a lease as the experts often tell people, but that’s because people do not understand what they are getting into from the beginning. If the residual is too high for the marketplace and they go over their miles they can really get burned, even though they have a lower payment during the lease term. If the charge for miles is too high on the back-end they can get pounded as well, if they turn it back into the manufacturer. I even know of manufacturer leases that will charge you for excess miles if you buy the vehicle out and most people are not aware of this scheme, so it’s always buyer beware when you purchase or lease a vehicle. The automobile industry is fluid and what was the situation three years ago, may not be the same today.
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Auto Consultant – John Boyd: The Cool Car Guy
John is an auto consultant with his license at a car dealership in Denver, Colorado. He can help you save time and money on any make or model, new or used, lease or purchase – nationwide! Call or email John about your next vehicle! jboyd@coolcarguy.com or Twitter @coolcarguy