Just because you're leasing a car instead of buying, don't be any less skeptical about promises that sound too good to be true.
After all, leasing is no less commitment. You're still signing a binding contract, so you can't be any less vigilant about negotiating and checking terms.
Before signing on the dotted line, make sure you understand the calculations used to determine your lease payment, the term of the lease, and all expenses included in your lease agreement.
Here are the 10 biggest booby traps of auto leasing:
Say you're leasing a $20,000 car. After two years, you've paid $2,400 on it. However, the car has depreciated to $16,000. To terminate the lease, you'll probably need to pay the difference between what you've already paid ($2,400) and the amount that the car has depreciated ($4,000) or $1,600. What's more, some leases require you to cover any remaining payments, says Jeff Ostroff, president and chief executive officer with the Fort Lauderdale-based ConsumerNet Inc., publishers of carbuyingtips.com. If you have more than just a few months left on your lease, these payments will quickly add up.
While the lessor may talk about "wrapping" or including these fees within a new lease, that's not the smartest way to go. You'll end up paying much more, because you're financing the amounts over a longer time period.
A lower residual value means higher monthly payments. A $15,000 residual value on a $25,000 car would mean your lease payments would have to cover the $10,000 difference. In a 36-month lease this would mean monthly payments of $277.77 ($10,000 divided by 36), not including interest, taxes and other fees. If another lender predicts that the same car will be worth only $13,000, your monthly payments will be $333.33 ($12,000 divided by 36).
A lower residual value is not always bad, however. If you decide to purchase the car at the end of the lease, you'll pay the lower residual value, plus any purchase-option fee.
Example: A car selling for $24,000 will have a residual value of $12,000 in three years. You'll need monthly payments of about $333 to cover the depreciation ($12,000 divided by 36 months). But if the starting price was $22,000 -- and the residual value remains $12,000 -- the monthly payments drop to about $278 ($10,000 divided by 36 months). Each month, you hang onto an extra $56.
A disposition fee is charged when you return the car. As its name implies, this covers the dealer's cost to dispose of the car. These fees usually are several hundred dollars. Finally, a purchase-option fee is the amount it will cost to purchase the car at the end of the lease. The exact amount can vary.
While these are one-time fees, they still affect the overall cost of the lease. You'll want to negotiate everything and consider them in your computations when deciding which dealer to use.
Let's say you have your eyes on a small SUV with a sticker price of $25,000. You negotiate the selling price down to $22,000 and the dealer says the residual value is $12,000. That means your monthly payment -- not counting taxes, interest and fees -- would be $277.77. But you try to get the price down by telling the salesman you can only afford $250 per month. He goes and talks to his manager and comes back a half-hour later with the good news -- $250 it is. But the term of the lease has gone from 36 months to 40 months -- which he may or may not point out at the time. All that's happened is the term has been extended -- you haven't saved one red cent.
The razzle-dazzle comes in when the salesman or dealer tries to confuse you about APR and what's called a "money factor." The money factor is expressed as a decimal -- let's say .00260. An unscrupulous salesman might boast about an interest rate with an APR of 2.6 percent. Then he applies the money factor of .00260 to his calculations and you think you're paying 2.6 percent interest or APR.
But a money factor of .00260 means an interest rate of 6.24 percent is actually being charged.
-- Updated Jan. 11, 2005