Calculating What Car Leases Really Cost

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About 25% of new car buyers lease their cars and the number goes higher for owners of luxury vehicles. In fact, a full half of customers driving high end model cars like Mercedes, BMWs and Jaguars lease their cars. Yes, leasing is a very popular method to use a car but the finances aren’t as straightforward as an out-and-out car purchase is. If you are considering leasing a car, here’s a few things that the finance department at Kernersville Dodge wants you to know.

What’s in Stock

You’ve seen the ads. “For just $199 a month you can drive a brand new Toyota Camry .” While this figure is technically possible, this price is usually when you lease a bare-bones vehicle. The problem is that dealerships often sell out of the bare-bones vehicles that they can offer such low leasing rates with. Typically the actual rate that you will pay for a leased car will be higher because the vehicle involved is more expensive because it is feature laden. These are generally not things of little value but features like up-graded interiors, air conditioning, infotainment systems and other creature comforts.

Don’t draw the conclusion, however, that since you see rock bottom prices in the TV ads that the dealer is executing a bait-and-switch. (Such routines are illegal anyway.) Every dealer quickly sells out their bare-bone units but keep in mind, you probably don’t want a bare-bones car anyway. Your lease payment will almost certainly be more than what you saw on TV but it will be on the actual car you want.

Selling Price and Residual Value

Ever wonder how the dealer sets the monthly lease price? It’s a complicated formula but you can ask your dealer to elaborate on this for you. If you do this, you will bump into a concept called the “Residual Value”. Car dealers set certain residual values for every car model they lease. This residual value will be what they estimate a car will be worth at a certain mileage and condition when the lease expires. As you’d expect, a higher residual value lowers the monthly cost that you will pay. High quality cars generally have higher residual value than others.

Beware and Understand the Money Factor

Deep into every car lease is another obscure financial factor you will find; an interest rate modifier called the “money factor.” Money factors are adjustments to the annual percentage rates. Unlike the annual percentage rate (APR) laid out in a finance contract, dealers write out the money factor in five decimals. They vary from car to car and reflect the “deal” the car dealer is offering you. Example: when a car dealer is trying to clean out some excess inventory, they will often adjust the money factor so your effective APR is less than usual and thus more attractive.

Additional Fees

But wait, there are more fees you should know about and they aren’t stated as such in typical lease agreements. They are more like “terms and conditions”. For example, as the owner of a leased car, you have to repair any damage that occurs and do it right away. You also have to have routine maintenance performed and you have to keep the vehicle mileage under a certain threshold before your lease ends. These are important restrictions so you should be careful to factor this into your decision to lease a car.

Don’t forget the sales tax also. This can vary more widely than you’d think. Some car dealers collect tax based on the full purchase price of leased vehicle, not the depreciated cost a lessee actually pays. This can be a chuck of money you pay upfront.

  

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