Understanding LEASING

[cane2025]

Hello all,

Let me begin by saying that anyone that can help me understand how a lease work is welcome to give me some input. Everyone here has different point of view and everyone has their opinions. I am looking for FACTS about leasing a vehicle NOT what your opinion is about leasing vs. financing.

HEre is what I have learned so far by browsing the net:
1. Money factor is the same as interest rate but with different number system(.00245)
2. Residual is what the car will be worth at the end of the lease term. If the car was worth 20k then after 3 years it may be worth 12k. This is were it gets confusing for me.
(Question) does this mean that the lower the residual the less my payment will become? How is the residual acquired? Do the dealers have a table that states how much a vehicle will be worth in 3 years and if so how is calculated? If the dealer knows what the price of a vehicle will be in 2019 then that means that "residual" is not negotiable?
3. If I am leasing a vehicle, is the credit check just to see what the "money factor" will be?
Q. Do I have to qualify to purchase the vehicle before I lease it? If the car is worth 70k does the credit check have to reflect that I can afford a 70k car like when you finance?
4. As with any vehicle that gets driven on a daily basis there will be scratches bumps and bruises in the body. If this happens when I return the vehicle then would that change the final price when I return it. If the cost to fix a scratch cost 2k then will that be added into the bill that I must pay before returning the car?
Anything else I missed or need to research and understand?

Thanks to everyone that may be of any help with providing FACTS. When providing information please use small words(lol) and try to use examples to give me a better picture of what you are trying to teach.

Thanks in advance,
Cane

 

[danygenesis]

This is a very good place to answer your questions.
http://www.leaseguide.com/

 

[Mark_888]

2. Residual is what the car will be worth at the end of the lease term. If the car was worth 20k then after 3 years it may be worth 12k. This is were it gets confusing for me.
(Question) does this mean that the lower the residual the less my payment will become? How is the residual acquired? Do the dealers have a table that states how much a vehicle will be worth in 3 years and if so how is calculated? If the dealer knows what the price of a vehicle will be in 2019 then that means that "residual" is not negotiable?

Residual is not what the car is worth, but what the lessor (such as a manufacturer) assumes it will be worth at end of lease. In most cases you will have an opportunity to purchase the car at that price when the lease is up.

The higher the residual value, the lower the lease payments, but the more you will have to pay if you want to purchase the car at end of lease. If you don't plan to purchase at end of lease, then the higher the residual value, the better because it lowers your monthly lease payments.

Leases that are offered by manufacturers (via dealers) sometimes are a bit optimistic about what the residual value is, because that encourages more people to lease and they get credit for more "sales." A third party leasing company (that buys the car from the dealer and leases it to you) is less likely to inflate the residual value.

 

[TroyK]

In most cases you will have an opportunity to purchase the car at that price when the lease is up.

this reminds me of an interesting story. a friend of mine had a 3yr lease on a camry that was up last month. he wasn't sure what he was gonna do, but decided to just buy the camry outright. well, the lease end price was about a grand higher than the book value. so, he offered to purchase the car from toyota lease for around a thousand dollars lower than the lease end buyout; and they took it! i was shocked...i'd never heard of anyone doing that before and didn't realize you could. even the local dealership couldn't believe toyota allowed it.

 

[linmk2]

I've leased my vehicles for two decades and possibly can answer many of your questions.

Leasing is simply another way to finance a car. When you buy, you are buying the entire car. In leasing you are basically financing the depreciation. The difference between the "capitalized cost" (what you paid for the car) and the residual value (what the estimate of the of the vehicle worth at the end of the lease) Other factors are also in play. The assigned yearly mileage and the mentioned money factor. Like you stated, the money factor is the interest rate. Low mileage leases have to lowest monthly payment. The lease payment advertised on TV are usually for 10,000 miles per year. I have always picked the 15000 mile a year lease. You can drive 1250 per month.

In regards to the residual value, as another member stated, the higher the residual value to lower the monthly payment. Almost all leases are Closed End, which means the residual value is known at the time of purchase. At the end of the lease you can purchase the car for that figure.

A credit check will be done, as with any finance purchase. Leases are no exceptions. I worked in the administrative end of car dealerships for about 22 years and my take is that, at least at the time, the credit standing requirements for leases were somewhat higher than with straight purchases. Even today on TV you will hear the phrase "well qualified buyers". What is a well qualified buyer? One who pays their bills always on time. They don't use credit in excess vs their income. No bankruptcy, or foreclosures.

Remember a Lease is just another way to finance, so would have to qualify for a lease just like you would for a purchase. The approval process is the same. Your ability to pay will be evaluated in a lease just as in a purchase. If your lease note will be $700, then you have to have the ability to pay. If you are buying the car and your car note is $900, you have to have the ability to pay.

Normal wear is considered when the car is turned in and there usually are no charges. Some lease companies change a return fee which covers these minor blemishes. However if the sheet metal is dented, the seats torn, tires worn out. Yes, you will be charged. It would be to you advantage to take exceptional care of the vehicle while it is being leased. Maintenance will be on your nickel, just like a purchased vehicle. Be sure to keep all maintenance receipts.

Other factors to be aware. Your mileage. Excess mileage at the end of the lease can cost you dearly. Make sure you select the right yearly mileage during your purchase. In other words, don't choose a 10,000 mile a year if you typically drive 15,000 miles a year. Also be aware that you will not have to report your mileage every year. It only comes into play at lease end. Also, if you chose to buy your car at the end of the lease, mileage does not come into play at all. At least on the vehicles I've leased over the years.

Do you like to customize your car? If so, leasing is not for you. You can not make large changes to the vehicle or there will be penalties. I'm taking about items that substantially alter the vehicle such as lowered springs adding performance equipment. If the car can be put back in factory condition before you turn it in at lease end, then there won't be a problem.

I hope I was able to address some of your questions.

 

[linmk2]

Troy that does happen on occasion. It's when the residual value of the car is considerable more than what the lease company can get out of the car at a wholesale auction. I suspect that's what happened in your friends case.

 

[cane2025]

This is a very good place to answer your questions.
http://www.leaseguide.com/

Thanks. I actually read this one along with a couple others.

 

[cane2025]

@linmk2

Thanks for the great info. I can see that you have been leasing for some time since you are very well informed on this matter.

 

[cane2025]

@Mark_888

I guess I had it backwards. The HIGHER the residual the lower my payments.

 

[Genesisimo]

linmk2 summed it up nicely. A few advantages of leasing IMHO:

--paying only for the value consumed (the difference between cap cost and residual value, plus finance charge, plus tax)
--in many states, paying sales tax a little at a time instead of all at once
--risking the bank's money instead of your money in case the car is totaled or stolen
--a three year test drive before you have to commit to buy
--in the case of manufacturer-subsidized leases, very favorable pricing and money factor
--when the stars align, 3-year lease followed by purchase (for cash) can be a very cost-effective way to acquire a nice car.

My opinion, shared by many: drive-offs should be kept to a minimum. First payment, acquisition fee, DMV, that's it. No customer cap cost reduction ("down payment"), as your money disappears if the car is stolen or totaled. All cap cost reduction should come from the dealer or manufacturer.

Great topic for discussion and learning.

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[danygenesis]

I've been leasing cars for many years too. Another important thing in a lease is the Capital Cost which is the final vehicle's price. The lower the Capital Cost the lower the lease payments, it's the the opposite of the Residual Value but the Capital Cost can be reduced in your favor, how? You have two ways, the first one is negotiating with the dealer to lower the sticker price, the same as you were buying the car, the second one are the incentives and rebates like cash backs, owner incentive, military, etc. The more incentives you get the less the Cap Cost will be.
The best lease deal is:
Lowest Cap Cost + High Residual Value + Lowest Money Factor.
The first depends on your ability to negotiate, the second depends on the manufacturer and the tird depends on your Credit Score.

 

[Mark_888]

The best lease deal is:
Lowest Cap Cost + High Residual Value + Lowest Money Factor.
The first depends on your ability to negotiate, the second depends on the manufacturer and the tird depends on your Credit Score.

One more thing:

Fewest hidden fees.​

 

[kn5owa]

Something no one thinks about:

Watch out for tail end fees/costs when you turn the car in:

1. Processing fees

2. Redemption fees

3. Phony fees for alleged damages

Once I tried to turn in a Ford at a local dealer and the dealer wanted a $500 processing fee and a $500 "Ford fee". I can safely assume the damage deposit would have been forfeited also.

I solved the problem by simply going to another dealer far, far away. Incidentally, the first dealer never even looked at the lease contract - totally irrelevant.

 

[cane2025]

linmk2 summed it up nicely. A few advantages of leasing IMHO:
My opinion, shared by many: drive-offs should be kept to a minimum. First payment, acquisition fee, DMV, that's it. No customer cap cost reduction ("down payment"), as your money disappears if the car is stolen or totaled. All cap cost reduction should come from the dealer or manufacturer.

Great topic for discussion and learning.

This was going to be my next question. If I'm looking at getting the lowest payment possible then wouldn't a down payment be the way to go? also, if the cap cost is $0 then does that mean that the dealer or manufacturer are taking care of that?

 

[cane2025]

Something no one thinks about:

Watch out for tail end fees/costs when you turn the car in:

1. Processing fees

2. Redemption fees

3. Phony fees for alleged damages

Once I tried to turn in a Ford at a local dealer and the dealer wanted a $500 processing fee and a $500 "Ford fee". I can safely assume the damage deposit would have been forfeited also.

I solved the problem by simply going to another dealer far, far away. Incidentally, the first dealer never even looked at the lease contract - totally irrelevant.

interesting, i have been so focused on understanding how to get the car that i forgot about hidden fees at the end of it all. thanks

 

[GenesisAWD]

Something no one thinks about:

Watch out for tail end fees/costs when you turn the car in:

1. Processing fees

2. Redemption fees

3. Phony fees for alleged damages

Once I tried to turn in a Ford at a local dealer and the dealer wanted a $500 processing fee and a $500 "Ford fee". I can safely assume the damage deposit would have been forfeited also.

I solved the problem by simply going to another dealer far, far away. Incidentally, the first dealer never even looked at the lease contract - totally irrelevant.

interesting, i have been so focused on understanding how to get the car that i forgot about hidden fees at the end of it all. thanks

I lease my current Genesis and my previous vehicle before this was a leased Ford. The Ford lease did not come with any fees at the end of the lease. I simply turned it in, they did the inspection and that was it. The Genesis does have a either $400 or $450 disposition fee that is part of the contract. That fee is only charged if I don't get another Hyundai vehicle. If I lease or buy another Hyundai after this Genesis then I don't have to pay that.

 

[danygenesis]

I've leased 4 Hyundai and the only "regular" fee when returning the car should be $400.00 Disposition Fee. And this can be forgiven by the dealer if you are leasing a new Hyundai again or be paid by other dealer if they are buying you old car.

 

[GenesisAWD]

One other aspect to the end lease process that a lot of people don't realize is to check for equity in your lease. When most people think of equity, they only think of equity in a purchased car but this is not true. Most people don't have much or any equity in their lease but it is possible and if you have it but don't use it then you're potentially throwing money down the drain.

I don't know if I'll have equity in the Genesis when I get to the end of my lease but I might. Reason is because under my lease I am afforded $12K miles per year. It's a 36 month lease so I can go up to 36,000 miles. Anything over 36,000 I have to pay a certain amount for each mile over. At my current rate I will probably only have around 22,000 to 25,000 on the Genesis when I turn it in. Because the residual value is an estimation set by Hyundai at the beginning of my lease that number may be higher or lower than the actual market value at lease end. The car manufacturer estimates the residual value based on the assumption that I will use all (or almost all) of my allotted 36K miles. When it comes time turn in my car and the current market value of my 25,000 mile Genesis is $2K higher than the residual, that is essentially $2K I can use towards my next vehicle as a down payment....whether that's a lease or a purchase.

There's no way of knowing if you'll have equity until closer to the end of your lease but it's just something that everyone who leases needs to at least be aware of the possibility so they don't waste that money.

 

[Jaeger]

You can only extract that "equity" of you purchase the vehicle at the agreed upon price (residual) and immediately resell it for $2k higher. Until you do, that equity is purely notional. It's not your car so it's not your equity. And how many people want to go through the double headache of an interim purchase and sale ?

 

[GenesisAWD]

You can only extract that "equity" of you purchase the vehicle at the agreed upon price (residual) and immediately resell it for $2k higher. Until you do, that equity is purely notional. It's not your car so it's not your equity. And how many people want to go through the double headache of an interim purchase and sale ?

In theory you're absolutely right. Nowadays, it's a very simple process though. Not much extra paperwork.