Do you ever dream about driving a fancy sports car, even way out of your price range? You probably do if you’re like anyone else. Thankfully, you don’t have to go into huge debt shelling out the full price or taking a high-interest loan. There are better alternatives to make your dreams a reality and get the best lease deal today.
If you’re not ready to buy your dream car just yet, you have two options to choose from – renting and leasing. You only rent for a very short period. For example, you could rent a car for a week to go on a cross-country business trip or a romantic getaway. Renting is a viable solution only if you don’t need a car for everyday use. Leasing is the more long-term solution between the two and is preferred by most people. A lease agreement hands over the vehicle to you for an extended period at an affordable price (typically for 12 months or more). The low monthly cost of leasing lets you drive even high-end luxury cars without having to shell out large sums of money. Overall, there are many advantages of leasing a car that you will grow familiar with by the time you finish reading this article. As the number one car leasing company in the United States, Oz Leasing aims to take things up a notch by letting you assume control over the whole process, including payment terms. But more on that later! Let’s first get you familiar with some of the important aspects that you must know to secure that you get the best lease deal available in the market. Here are 5 factors that play into getting the most of your lease deal:
1 – Understand Your Monthly Lease Payment
By knowing what specific charges your monthly lease payments will cover, you will be in a better position to plan your budget without having to worry about unwarranted or avoidable costs. It’s important to choose a lease dealer that is transparent with all charges and doesn’t hide fee in the fine print! A lot of factors are taken into account to calculate the monthly lease amount for a car. These include:- Capitalized Cost: The negotiated selling price of your car is called the capitalized cost, sometimes referred to as the “cap cost”. The lower the cap cost of a leased vehicle, the lower the monthly lease fee.
- Capitalized Cost Reduction: Capital cost reduction is anything that reduces the cap cost. It could be a down payment, rebate, or trade-in-allowance. The higher the cap cost reduction, the lower the monthly payments.
- Residual Value: The value of your car when the lease agreement ends.
- Depreciation: The amount you will need to pay for the expected decline in value of your car during the duration of your lease. This doesn’t include any cost that you may have to incur for repair etc.
- Rend Charge: A fixed amount that’s charged on a monthly basis in addition to the depreciation value of the car.
- Sales Tax: It’s the amount you’ll be paying in sales tax each month. Some states collect taxes on lease vehicles at the beginning of the lease term, while others collect it incrementally during each month. If you plan on moving states, check with your dealer to verify how the new tax laws would apply to your lease.
- Mileage Charge: All lease agreements have a pre-specified number of miles you can drive each year. You will be charged extra if you exceed that limit.
- Liability and Insurance: You are required to carry a specific limit of liability insurance for leasing a car. Apart from that, the lessor is also legally obliged to pay for repairs and maintenance when the car is under their care.
- Other Taxes: These include registration fees, license fees, and additional state government taxes for owning and/or operating a vehicle.
- Termination Fee: If you want to terminate a lease agreement ahead of time, your dealer may charge an extra fee known as the “termination fee”.
2 – Selecting the Vehicle
After you understand all the factors that affect pricing, the next step is narrow your selection to the car that best suits your needs. You should consider the vehicle’s fuel economy in relation to the miles you typically drive in a month. Do you prefer a convertible? A sedan? An SUV? Be clear in your mind what type of car you want to lease. You might be set on a super luxury Mercedes but still carefully compare your top 5 vehicles. You should factor in safety, performance, cargo, and other features. List out all comparable features of any vehicle and rank them as most important to you and your needs. Choose wisely as you could always save some money by picking a car that promises a higher fuel economy and dependability, as well as low insurance premiums. And more importantly, choose a car that holds its value over time, or what we call “residual”. Allow us to illustrate this concept:3 – Residual Value
When you purchase a car, you pay 100% of its price all at once – typically by taking out an auto loan. On the other hand, by leasing a car, you are only paying for the car’s value during the lease period. For example, if your lease lasts for two years, you’ll pay for two years of the car’s value.
However, don’t forget that you are driving the car for the first two years of its life – when it’s brand new and has a higher valuation than, say, in its fourth or fifth year. As the car ages, its market price reduces, commonly known as depreciation. The dealers will charge you a fee against the expected decline in value of the car during the lease period (known as “depreciation fee”).
And here comes the important part: Not all cars depreciate equally. Some cars hold their value for longer than others, i.e., they depreciate less. A car that depreciates less is said to have a high “residual value.” This means that the residual (or the amount of estimated market value) is still high. Ideally, your priority should be to lease a car with a greater residual value compared to its counterparts. Let’s illustrate that with an example: Say an uninformed shopper, Molly, leases a $40,000 car with a weak residual value. She leases the car for three years during which it loses 50% of its value. Therefore, she will need to pay the depreciation amount ($40,000 ÷ .50 = $20,000), divided into 36 monthly payments of ~$555 a month for 3 years (plus the regular fees). You, meanwhile, having learned from Molly’s mistake, did your research and picked a car that also sells for $40,000, but has a much stronger residual value. It loses only 25% of its value over the 36-month-long lease period. Therefore, you’d only pay a depreciation fee of about $10,000 (25% of $40,000) divided into 36 monthly payments of ~$278 a month (plus the regular fees). Clearly then, it pays to research the particular vehicle’s residual value before committing to a lease. Now that we’ve got the selection of the car out of the way, let’s focus on mileage options: