By on July 6, 2016

Suckers at the Stock Photo Dealership with a Credit Card

A record 31 percent of all new vehicles sold this year in the U.S. are leased. I spent a good part of my career studying why some people refuse to lease. Much of their resistance stems from bad buzz. Some say it’s because of the stories they heard about ’80s-era open-end leases where owners were responsible for paying the car’s residual value at lease end. (These are the same customers who will not buy a Hyundai today because they produced crappy cars in the ’80s.) Others oppose leasing because they heard about a guy whose cousin’s neighbor had to pay $5,000 in wear and tear or excess mileage charges at lease end. And there are those of you who will brag comment below about how you always pay cash for your cars and don’t understand why other people won’t follow your lead.

This article is not designed to convert such non-believers to leasing. This advice, drawn from my years in the auto finance business, is for buyers who know the basics and benefits of leasing, want some timely tips on how to get the lowest possible payments, and want to pay less money on lease-end charges.

Knowing your lease money factor is not as important as knowing if the dealer marked it up to make more profit on your deal

We’ll start with the mysterious money factor. Even the Consumer Financial Protection Bureau, as it continues its misguided mission to stop dealers from marking up interest rates on auto loans, does not seem to know that dealer’s can mark up lease money factors.

The lease money factor is not disclosed on lease contracts, thus making it a breeze for dealers to add a few points to it, limited only by the bank’s markup policies. As an example, the dealer markup could bump the payment on a $30,000 car with a zero down, 36-month lease from roughly $451/month to $474/month. Dealers cannot alter the other part of the lease payment, the vehicle’s residual value, which has a bigger impact on the payment.

Current standard money factors for folks with excellent credit range from around .00180 to .00210, depending upon bank. We found current manufacturer-subsidized rates (read: for cars that are languishing on the lots) as low as .00001 for a 2016 Volkswagen Tiguan S and several other vehicles according to

The widely publicized claim that multiplying the money factor times 2400 to determine your “interest rate” is not accurate say some industry experts. A money factor is a mathematical shortcut, not an APR. Since a lease does not amortize down to zero as does a loan, and instead amortizes down to the residual value, I tend to agree that this is a misleading comparison.

Whether your initial payment quote came from the salesperson or the finance manager, rest assured that it’s probably already marked up. Your goal is to get it back down to the bank’s rate. One strategy is to ask the finance manager to show the money factor and to see a copy of the bank’s rate sheet to verify. If you have less than perfect credit, your application may have scored in a lower “tier” and assigned a higher money factor. You can glean this information by asking the finance manager to show you the “call back” sheet from the bank, which tells the dealer exactly how to price your lease contract.

What if you verify you are getting the lowest money factor and still think it’s too high? There is basically no alternative at this point if you’re going it alone. Unlike a traditional auto loan, you can’t shop rate as very few local banks and credit unions offer leasing.

Find out if your dealer has marked up the acquisition or “bank” fee

The lease acquisition fee, or “bank fee,” is set by the leasing source and can range from around $400 to $1,000. Most banks allow dealers to mark it up an extra $100 to $300, money that goes straight into a dealer’s pocket. One way to determine the actual fee is to search carmakers’ websites for special lease deals, which never include any dealer markup on the acquisition or “acq” fee.

BMW’s site states that its fee is $925. If one of its dealers quotes you $1,125, it’s making $200 in profit. Some automakers like Lexus will not disclose an acquisition fee on its website, instead referring you to the dealer for any fee information.

As with the money factor, ask the finance manager to show you a copy of the bank’s policy on acquisition fee markup. If you are the type of shopper who calls or emails multiple dealerships for price quotes, that is the ideal time to ask what they will be charging for the acquisition fee.

Sitting in front of the finance manager and asking for rate sheets might lead to an awkward interaction, but bear in mind that you’re in control at this point. You’re the only calm person involved in the transaction. Your salesperson is worried about finding the next “up.” The sales manager is convinced that the finance manager is about to piss you off by trying to sell you TruCoat and blow the whole deal. The finance manager is stressed because he or she can only make commission by marking up the money factor or selling you products. This hysteria hits its height on the last day of each month.

Take advantage of all this tension. If the answer to your disclosure requests is a flat refusal or “it is against our policy to show you,” threaten to walk away. You may be beaten down at this point, especially after weeks of research, test drives and hours of negotiating, but hang in there and get the payment you deserve. It is unlikely you will leave without your new vehicle.

Insane People at the Stock Photo Dealership

Do not let a dealer place your lease through an independent bank instead of its manufacturer’s captive finance arm

You will lose any factory lease loyalty incentives by going with a non-captive bank. Captive banks can include waived payments and disposition fees if you stay with your brand and its bank. If your dealership offers you a lease from an independent bank, insist on using the car company’s captive instead. Independents also have a record of charging you for every minuscule scratch and tear on lease-end charges, as they do not have the processes or resources to dispose of off-lease cars without taking huge losses.

For example, occasionally U.S. Bank would pick a high-end Benz and undercut our lease payments at Mercedes-Benz Financial Services by a few bucks and some dealers would contract some clients with them. The bank’s strategy was to offer ultra-low money factors and low residual values with the hope that the client would purchase the car at lease end, apparently forgetting that customers lease because they want a new car every few years.

Three years later, the angry clients would be yelling at the bank and the dealer over their enormous lease-end bill, U.S. Bank would lose its shirt at auction on the car, and Mercedes-Benz would lose a customer for life.

There are some vehicles that the carmaker’s captive bank choose not to lease. Our Kentucky correspondent Bark M. tipped us that Ford Motor Credit does not offer leases on the Shelby GT350R and Focus RS. This is likely due to the fact that many high-end variations of a model historically have lower residual values then a base version. For example, a recent 36-month residual on a 2016 Mercedes-Benz C300 was a respectable 60 percent, while its AMG sibling — the C63 S — has a dismal 47-percent residual. From a payment standpoint, you are being forced to finance such cars or take your chances on an independent lease source.

Leasing companies are car brokers: they are middlemen who will always cost you money and sometimes cost you the entire deal

Most leasing companies are simply brokers who run your deal through a franchised dealer and its captive bank after taking its $300 to $2,000 dealer commission. Many have a history of ripping off automakers and their banks through falsifying customers’ credit applications, identity theft and export scams.

Banks are so tired of being conned by brokers that many require dealers to disclose whether the deal came from a broker or leasing company. If it’s through a broker, the bank will go over your application with a fine-tooth comb plus take a deep dive into your background and the broker’s background. People with less than stellar credit thus have a better chance of being denied a loan or lease than had they applied directly through a dealership.

If your hatred of the dealer experience trumps your need to get the lowest possible price, you may enjoy the convenience that brokers/lease companies can offer. Most can hook you up with any brand of vehicle and may call dozens of dealerships to get you a good deal, which will include a commission fee.

Lincoln-1977-ad Courtesy

Beware of open-end leases and non-walk-away balloons

I doubt there are many banks still offering open-end leases, where the customer has to pay the residual amount at the end of the term. However, in certain states such as Illinois where tax laws make leasing too costly, banks offer balloon financing in lieu of leasing and most of these are walk-away balloons with no obligation at end of term, other than normal fees.

A few years back, BMW Financial brought back non-walk balloon notes in California, much to our delight at Mercedes-Benz Financial Services. We had faith that certain BMW stores would not disclose that the customers were responsible for paying the balloon amount at the end of the contract and this would result in unhappy clients switching over to Mercedes-Benz products.

If you drive a lot of miles or are accident prone, you should always lease

That is not a typo. Many people think that they “drive too many miles to lease,” when in fact the benefits of leasing are even greater for them.

Suppose you have a lengthy commute and drive 25,000 miles per year and you finance $30,000 at 3.0% APR on a vehicle for 72 months. At the end of three years, the point at which most people trade their cars, you will owe around $16,000 and even a high resale value car like an Accord or Camry would only be worth $9,000 to $10,000 in trade with 75,000 miles on the clock. If your car had a repaired fender, you can deduct a couple grand or more depending upon the number of times the used car manager shakes his head as he inspects your vehicle.

Now suppose you leased for three years and purchased an extra 30,000 miles upfront to cover the amount over the standard lease allowance of 15,000 miles per year. At 20 cents per mile, the additional miles will cost you about $6,000 over three years, so you would be slightly ahead vs. financing. If you had the repaired fender, you would be several thousand dollars ahead as most captive lease companies will not ding you for it unless the repair and paint job was totally botched.


At Mercedes-Benz Financial Services, I refereed many disputes over lease-end charges and I know of only one case where we had to charge for poor body work because the quarter panel’s poor patina appeared to be from Testors model-car paint applied at night.

There are ways to reduce paying some excess mileage and excess wear and tear charges

The only way to completely avoid excess mileage charges is to, well, not drive excess miles. The biggest mistake that people make is not to know the amount of miles they drive and enter into lease contract for 12,000 miles per year when they actually drive 15,000 miles per year. At lease end, they will get a bill for the excess miles driven, typically at 25 cents per mile.

If your life or job situation changes mid-lease and you need to add more miles, a simple call to the bank will solve this problem. Most will be glad to add the miles to your contract and increase your payment, which is a better solution than paying a lump sum at the end.

Many banks have copied a policy we pioneered at Benz where unused pre-paid mileage is refunded to the customer at lease end, whether purchased at time of sale or mid-term. Your bank’s mileage policy may vary.

Banks aren’t typically flexible on waiving excess mileage charges, but that’s not the case with excess wear and tear charges. A call to the bank may yield a 20-percent discount off the top, particularly if you’re a repeat customer to the brand. Better yet is to complain to your dealer’s finance department. Dealers hate heat and love to pass it off on the factory. They may be able to make a call and get a large part of the bill waived.

Another plan is to negotiate with the dealer to have it either pay or roll all the excess charges into the new car purchase, particularly if the amount is extremely high.

Banks will continue to offer used car leasing and will continue to fail for one reason

Auto lending giant Ally Financial recently announced that will offer leasing on select pre-owned vehicles, thus continuing the musical chairs of banks jumping into used car leasing, seeing it fail, and jumping out. What Ally does not understand is that dealers won’t sell pre-owned leasing.

A number of captive banks have recently launched pre-owned leasing to help move an influx of year-old loaner vehicles and lease returns. Most dealers reacted by complaining that payments were not lower than those on a new car, thus forgetting one basic tenet of the pre-owned business: new and used car buyers are different. They rarely cross shop between new and pre-owned. If a used car buyer lands on a used Audi A4, that is the car that he or she wants. At that point, there is no reason dealers can’t offer that customer pre-owned leasing as an alternative to financing, but they don’t.

Leases Courtesy

This product does fill a niche: three- to five-year old high-end vehicles. If a store “stole” a baller car on trade, found a bank with a residual value close to what it paid, and had a finance department that understood pre-owned leasing, you might get a very attractive payment.

In other words, it’s probably not going to happen but it doesn’t hurt to ask. I have seen this work, but in each case it was the dealerships’ used car managers who glommed the deals for themselves.

The same conundrum applies to advanced leasing options on new vehicles, such as multiple security deposit leases and one-pay leases, two products that offer highly reduced money factors. The majority of dealers simply do not have the knowledge or patience to sell them.

You may now know more about leasing than some car dealers

We know of a luxury dealership in a very upscale market whose sales manager had no idea how to structure a new-car lease deal. (He also probably spewed the Standard Dealer Excuse about why its leasing penetration was the lowest in their market: “The customers in our area are different. Their Daddies always told them to buy and never rent.”)

Of all the obstacles hindering people from leasing their vehicles, having dealers who cannot present it is the one that drove us factory guys nuts.

[Images from file, Classic Cars Today, Wall Street Journal]

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102 Comments on “Auto Leasing Insider Tips, Tricks, Myths and Misconceptions...”

  • avatar

    I’ve never leased a vehicle, mostly because I drive enough where it wouldn’t be sensible to lease my primary vehicle. Now, the two Mustangs I had I probably would have been better off leasing, but now I’m in a situation where I have a Ranger and two bikes, so I don’t need another vehicle.

  • avatar

    Nice piece.

    But of course:

    MAN: I’ll take her.
    [Clerk swipes the card]
    CLERK: Sir, your card was declined.
    MAN: I have another one!
    CLERK: Sir, you have to sign on the back of it.

  • avatar

    Wow.. CGI skin is looking more realistic every day!

  • avatar


    Finance Japanese (if you must)

    I lease cars on cycles every 3-4 years.

    The main benefit is never getting stuck with older technology.

    Another benefit: you don’t need “extended service contracts”. You can use that warranty money as a down payment on the next car.

    Another benefit: you ALWAYS have a new car.

    Another benefit: performance cars have expensive off-warranty repairs… My 2015 Jeep SRT just hit 5000 miles. With any luck, I’ll have the TRACKHAWK before my 4th oil change or 2nd brake job (since I drive hard).

    You could do the same rotations with financed cars but the problem is DEPRECIATION.

    You don’t get stuck with depreciation if you lease.

    It’s THEIR PROBLEM. Not yours.

    Considering how much competition there is in this market, dealers will sweaten lease deals just to keep you from taking your business from Jaguar to Maserati or Mercedes.

    I leased a 2013 Azera (loaded) for $3000 down, $425 a month.

    I just re-leased a 2016 Genesis H-Trac for $2000 at $350 a month.

    Could have never pulled that off with a finance.

    Next time they’ll be even more desperate to keep me.

    “O your number’s a little to high – MAYBE I SHOULD GO BUY S BMW INSTEAD? They said they’d give me _____ for $____…

    O ok- now you’re ready to give me what I demand?


    {this is how my negotiations go}

    “Why would I ever consider paying a penny more?

    My offer is this: NOTHING”

    Michael Corleone

    For my uber service I lease cheap, soul-less Japanese econoboxes large enough to ferry people around but reliable enough to have no issues. I may change my fleet to Priuses and Pacificas.

    Point is, mileage (15,000). Hasn’t been a problem since NYC is compact.

    Leasing has obviously backfired on Toyota and Honda because now they are being forced to consider leasing pre-owned cars with fewer than 30,000 miles.

    They outsell everyone else with subprime loans backed by Japan’s government but the chickens always come home…

    • 0 avatar

      I agree and I have an additional point of view. Gas prices. I just leased a 2016 Genesis and it gets (real world) 15 mpg or so in our constant traffic. Three years from now, if gas is $5/gallon, the resale will be horrible. Let Hyundai take that risk. I’ll lease some new 2 cyclinder hybrid rechargeable car from whatever dealer wants to offer me a good deal.

    • 0 avatar

      “You don’t get stuck with depreciation if you lease.”

      Yes you do. A lease is literally you paying for the depreciation of the vehicle, amongst other things.

      • 0 avatar

        I’d like to think that what he meant to say is that you don’t get stuck with the *variability* of depreciation when leasing. But then, we are talking BTSR.

        As the old expression goes, the truck may be big, but the bus was short.

        • 0 avatar

          But you DO get stuck with variability (albeit, I will admit, to a lesser degree). The big things that determine depreciation are accidents and repairs and such. You’ll still have to pay if you really damage your car.

          That said, you won’t pay for things like company scandals, or minor repairs, so there is that. Yes, you are right, that’s probably what he meant.

          • 0 avatar

            But then he writes things like “subprime loans backed by Japan’s government” and you wonder whether it’s a bot that writes this garbage.

            But if you remember that the main theme is “I spend a lot of money on fast cars, so I’m better than you,” you can skip a lot of the excess verbiage.

    • 0 avatar

      bigtruckseries-you are a moron with more money than brains. Dealers love suckers like you. It pays for their vacation homes and Rolexes. I’ll keep my older car and money in the bank. You enjoy your fake status and attempts to buy-sorry-lease happiness.

    • 0 avatar

      Another benefit. You only pay sales tax on the lease payments you make vs financing where you pay sales tax on the entire cost of the vehicle.

  • avatar

    Wow that was a long article. Lots of useful information for someone who leases i’m sure, but not for me though. I’m one of those who like to pay cash.

    • 0 avatar

      Same here. I’ve never had a car payment and have no intention of getting on that treadmill. It’s hard to understand going into debt to purchase something that’s just going to rapidly depreciate. But if that’s what floats someone’s boat, have at it.

      • 0 avatar

        Why would you pay cash when they will loan you money at 0% interest?

        • 0 avatar

          For me, low or zero interest masks the pain too much and I end up spending quite a bit more.

        • 0 avatar

          Here in Canada, Mazda will finance a Mazda5 at 0% for up to 36 months.

          If you pay for the car up front, you get a $4000 discount.

          The “free” loan costs you $4000.

          • 0 avatar

            Exactly, it’s never as simple as it seems

          • 0 avatar

            All that requires a customer who is able to do math. Non-incentive rates for new auto loans are still in the sub-3% range. If a customer is too stupid to plug both numbers into a car loan calculator and figure it out, I’d say that’s on them.

            Quick math, assuming an arbitrary $20k transaction price and a 5 year 3% loan over the 3 year 0% one. The discount saves you $2750 over the loan and has payments that are just over half albeit over a longer period. You are paying $1250 in interest expense though.

        • 0 avatar


          You have to read the fine print on those 0% loans. They usually charge $17.00 per $1,000.00 financed.

        • 0 avatar

          I converted a few sales to financing because of this exact point.

    • 0 avatar

      Cash to me makes sense for an inexpensive vehicle (~$15k or less) but if you are interested in say a $50-150k vehicle it seems unwise to put out that much cash when you could be using that to invest elsewhere while making a return.

      Also leases are great if you own your own business and in CA for instance we are taxed on the payment of the vehicle, not the sale price of the car.

  • avatar

    Photo #2 Caption: I’ll give you my car if you can make your girlfriend laugh like a horse.

  • avatar

    Leasing: the only smart way to buy German cars.

    Personal Anecdote time! A relative purchased a BMW X5 during the real estate bubble heyday. He figured it was BMW ,so it would last him forever after he paid it off.

    What actually happened is a metro Minneapolis area BMW service manager laughed himself into a stupor.
    The truck was as problematic as a BMW tends to get, and at 50K miles the dealer offered a devils bargain.

    He could keep the car, skip the $5,000 warranty extension, and play financial chicken with the laws of probability on a 50k mile BMW SUV.

    He could keep the vehicle, pay $5,000 for the warranty renewal, and have a functioning truck and a sore posterior.

    He could try to sell it. By now the bubble burst and foreclosure signs are sprouting up like wooden mushrooms.

    Or he could trade it on a Shiny New BMW.

    Cackling laughter may have been heard in the background as lightning flashed in the sky.
    Had he leased the thing from the jump, he wouldn’t have sunk years of money into a low resale money pit. He’d have just handed over the keys and moved on.

    Seems the European firms only build modern cars to last the first owner or lease. It’s best to act so financially.

  • avatar

    I have always been in the no leasing for me club, I drive for work about 25,000 miles a year, reading this it seems you think leasing may make sense but I still do not see it, the only way your example works is if you buy extra miles ( a ton as most leases I see are 10-12,000 miles a year ) and than either pay a higher lease or have a ballon payment or mileage fee at the end, in your example the high mileage sales guy trades in his car that he has a 72 month loan on midway. If that happens they deserve to take the hit. I pay off my cars in 48 months or less and then drive payment free for a few years until I hit 150- 175,000 miles and my kid ends up w my car and I start over or I sell it pretty cheap and start over. I still do not see how leasing would work for the high mileage driver.

    • 0 avatar

      I’m curious about this as well. My wife needs a new car to replace her Lexus RX. She drives over 20k miles a year. One of the issues I see on examples like the one Steve provided is that they assume some base level Camry of whatever. When I tried to run the math on essentially doubling the 10k miles Lexus allows on their lease, the numbers were huge.

      A second point, I’m not sure you are right about new vs. used cross shopping. In my case, I’m either looking at buying a CPO or leasing new. Those are the realistic options.

    • 0 avatar

      Likewise for me, with the same mileage commute. We can play with actual numbers since I was looking at buying a new Jetta Sport recently.

      The corporate lease special right now for a base Jetta S is $159/month with $2k down, and 12k miles per year over 3 years with .20/mile overage so $7800 of purchased miles, and a disposition fee of $325 at the end. We’ll disregard TTL or dealer fees. Total expenditure over 3 years is $15848, and you’re dinged for damages if there are any on turn-in. Plus, $1k is required up front, and $7800/36 is 216, so your lease payment is actually more like $375.

      MSRP on the same car right now is $19,600 and there is $1k of customer cash out there (also applied in lease incentive). assuming an incentive finance rate of around 2.5%, you own the car for $330/month on a 5 year loan, or $536 on a 3-year.

      TrueCar livens up the discussion a little bit more though. Their price tool puts us at $13670 price with the incentive applied. That’s a $394 payment on a 3 year note, or $242 on a 5-year. If their lease tool is to be believed (I never hear about it being used for leases so I’m not 100%), it’s $185/month with 2k down for 25k/year. over 3 years, that is $14460, which actually **more** than the 3-year payment total to purchase ($14184). And you give the car back at the end.

      Now, I know that this is not a one-size fits all thing, but in almost every high mileage situation I’ve seen, buying is the more economical choice. If I’m out the same amount of money at the end of the day, I’d rather have a car with 75k on it at the end rather than not, as it’ll still fetch $6-8k through some channel on the back end.

  • avatar

    “The bank’s strategy was to offer ultra-low money factors and low residual values with the hope that the client would purchase the car at lease end, apparently forgetting that customers lease because they want a new car every few years.

    Three years later, the angry clients would be yelling at the bank and the dealer over their enormous lease-end bill, U.S. Bank would lose its shirt at auction on the car, and Mercedes-Benz would lose a customer for life.”

    How does a low residual value equate to big loses when auctioned?

  • avatar

    To lease or not to lease is a simple question. Total up the number of lease payments, plus up front charges, plus other expenses vs the total of loan payments over the same period, less the anticipated resale.

    I have yet to see the result be less for a lease, especially if you run the calculations out for the 8-10 years I keep cars.

    • 0 avatar

      The best results from a lease often come when the residual is artificially high. That implies that you would turn the car back in at the end of the lease term, rather than buying it for the stated residual. If you like the car and want to keep it, you’d buy another used example of the same year/make/model — or even buy your own car back after turning it in, which the dealer is sometimes willing to do as part of one transaction.

  • avatar

    I probably should have looked into leasing my wife’s Clubman. I have no idea what the residuals would have been on an ordered car, though. We skipped out on many options that other Clubman owners seem to be ordering (auto-aiming headlights, auto tilt mirrors, adjustable suspension, automatic transmission, navigation). My thinking is that they would have been put black marks on the residual based on the 6MT and relatively Spartan optioning. Like her recently sold 2005 MINI Cooper S w/ LSD, I figure the Clubman S w/ 6MT and AWD is probably going to be a reasonably sought after configuration in 6~10 years when we would likely consider selling it. The only reason I’d ditch it after 3 years would be if it becomes a warranty queen. At that point, I take my lumps on the MINI and push her into a Lexus sedan/CUV.

  • avatar

    There’s no shortcut to doing the math.

    Again: there’s no shortcut to doing the math.

    If you just buy a new car, and don’t do the math on leasing it, you might be losing money.

    If you just lease a new car, and don’t do the math on buying it, you might be losing money.

    If you look at a lease, and don’t do the math on whether the residual is realistic, you might be losing money. (Artifically high residuals are the manufacturers’ favorite way to subsidize leases and can occasionally result in a steal.)

    And doing the math will make you leasing-agnostic.

    I leased my Honda Civic, because at the time (with very low income numbers on paper) I was not getting particularly good credit terms for buying. I bought my Forester XT, because the lease residual was unrealistically low, and it proved to be the right decision when the thing depreciated only $4000 during my three years of ownership. I leased my C-Max Energi, because Ford was offering an extremely attractive lease deal with incentives. I bought my G8 GXP, because it’s almost impossible to beat 0% at 72 months. Always do the math and figure out what the best deal actually is.

    • 0 avatar

      Where do you get the numbers to do the math? It’s not a lease vs. finance question for me. If I’m considering leasing, I wouldn’t consider buying that same car new in most cases. I’d go CPO. I’m sure as hell not going through the buying process to get the details. I want the details at home, before I ever set foot in the dealer showroom. This is what is so aggravating about car shopping.

      • 0 avatar

        It takes a bit more banging on the salesperson with lease terms than it does with the single number of sale price, but in my experience eventually dealers will share the key terms of their lease offer (residual, money factor, extras rolled into the lease). Residual will almost always be the same; it’s the MF and extras that separate one offer from the next.

        Salespeople can be aggravating, but going in fully informed can save enough to be worth the aggravation.

        To judge residuals, I tend to use earlier years of the same model or the closest equivalent. It’s not perfect, but it gives a good general picture of whether the residual is high, low, or accurate.

  • avatar

    All you REALLY need to know is: “Leasing is another way of buying a car on credit. No more. No less. The only difference for a regular consumer is that leasing gives you predictable depreciation, while financing does not.”

    It’s certainly easy enough to use your smartphone to convert a monthly lease payment, purchase price, and residual value into an APR. Pretend the “acquisition fee/disposition fee” are a down payment. Evaluate accordingly, keeping in mind that unless it’s incentive financing, the bank is TRYING to structure the deal so they make additional profit in return for taking on the depreciation risk.

    Maybe in the end leasing is better, maybe it’s traditional financing.

    P.S. “At the end of three years, the point at which most people trade their cars,…” This is incorrect: According to IIHS, the average new vehicle is retained by the original purchaser for 6.5 years.

    Maybe auto journalists trade this often, but it is by no means the norm.

    Several TTAC writers keep repeating this “people go through cars like Kleenex” trope (for different reasons, other TTAC writers use it to justify scolding banks over six-year loans), and I wish they’d quit it, since it’s just not true.

    • 0 avatar
      Steve Lynch

      In the luxury car industry I was in it was always around three years if they financed for five.

      Among non-luxury brands you are correct.

      • 0 avatar

        If you meant “luxury car owners” you should have said so. Certainly “luxury car owners” =/= “most people”.

      • 0 avatar
        Silver Bullet

        Thanks Steve, Your auto leasing article resonated well with me. We bought our last car but I’m beginning to see value in leasing — especially as a means of technological innovation and repair expense risks. My question is: How does one lease transportation, versus a specific car, at an advantageous price point. We have a family member who can afford one car and that one car must be 24/7 reliable. I understand reliability ratings, but other than working the phones how does one know what manufacturers/dealers provide loaners while the leased vehicle is in for service?

    • 0 avatar
      Testacles Megalos

      it can be if you know your automotive tastes, prefer machines that historically hold their value, and are willing to bet on the outcome of the lease…

      in the 90s I had my own business. My accountant suggested I lease the business car to simplify writing off the business-related car expenses. I didn’t like the idea of not owning my car and had been keeping logs of business miles on my owned car, etc…. When the Clintons raised income tax rates, he convinced me it was time to let the Fed’s hand in my pocket at least do some work for me. Go negotiate a lease with a relatively big (pre-tax) monthly payment (as much as would not draw the IRS’s attention) and a relatively small (post-tax) buyout at the end, and plan to buy the car at the end. It can work great if you really buy the car out and the car really holds its value.
      In this particular case, it worked out and I got a great car which I still own and drive, 22 years later, for well less than sticker out of my post-tax pocket.
      Not an approach for everybody for a variety of reasons, but in the right circumstances it makes “leasing” very attractive.

  • avatar

    Lease makes sense if you like to have the newest thing. Our strategy was finance at whatever term gives 0% rate and then keep it alive as long as makes financial sense. Still cheaper over time even considering repair bills…

    However that strategy may change after the wife’s Santa Fe cost us $1300 then $800 to repair the same problem. Turned out there are two different things that cause one error code and they fixed the wrong one.

    It seems to me that manufacturers now are putting less thought into being able to repair something easily (eg. $400 to replace a $10 oil pressure sensor because of the labour involved), and also getting better at designing parts to last just beyond warranty.

    • 0 avatar

      Not that this is universal, but on average cars are more reliable than ever, and lasting longer than ever. Certainly total repair costs have NOT been on the rise, even if the repair bill is higher when something DOES break. Most parts in most cars last WAY beyond warranty. (Registered vehicles would not have an AVERAGE age of 12 years if this were not the case, and who knows what the average age of a car is when it goes to the crusher.)

      I remember when in Consumer Reports car reviews, they used to have a bit in the end listing how many defects they found in their tested cars (and they used something like a 4:1 conversion factor for minor finish defects.) It was very common to say something like: “We found six defects in our car, four major, one minor, and three finish defects we counted as one.” And this was utterly routine. For each and every review. They dropped the practice when most cars did not, in fact, ship with defects. (In another update, they stopped using their “bumper basher” when virtually every car got damaged by it, and it was driving up the cost of their cars too much.)

    • 0 avatar
      Felix Hoenikker

      Did you get the repairs done at a dealer or an independent? I found that the price difference for the same work to be hhhhuge! The local Chevy dealer wanted over $800 to replace the fuel line on my Saturn Ion. The independent garage I deal with replaced the fuel line along with two front tires and an intermediate steering shaft for $850. I thought the later was reasonable and the dealer price nuts!

  • avatar

    My only issue with leasing so far has been my college age daughter who keeps scuffing up the damn car…needs both bumper covers and some touch-up on the quarter panel and back door. I have to find a cheap place that does “used car” work instead of a proper collision shop, to rig it up for lease turn-in time.

    I do have a question…I have never had to put tires on a leased car, but with a 2014 Accord it’s going to need tires…will I get dinged by Honda Financial if I put a 2nd tier brand of tires like Cooper or Kelly on it? Am I stuck with replacing the crappy Firestones with more crappy Firestones?

  • avatar
    Jeff Waingrow

    If saving money is of paramount importance, I’d buy a slightly less expensive vehicle, save myself a whole load of effort and grief, and be done with it. Spending half your life trying to outfox the fox when leasing is a waste for anyone able to use their time more profitably.

  • avatar

    I typically lease my wife’s car. Do not mind leasing at all. I do like getting a new car every 3 years, and love being perpetually under warranty. I typically buy my daily driver because I put a great many miles on it and it is more subject to wear and tear.

    But do the math, how many years do you typically keep a car. It can take 7, 8, 9 years for a purchase to be cheaper than leasing for the same time period. For those who intend to keep their cars for a decade, then its a no brainer and leasing will never be less expensive than a purchase. On the other hand, if you are like me and want a new car as soon as you pay off your old one, well. The math gets quite a bit closer.

    I have also bought out leases at lease end where the excess miles/wear did not make sense to pay off or roll into a new vehicle. That is another good potential article. What better used car to buy than one you know exactly the maintenance history, how it was driven, you know the driver. The same car would typically be significantly more if you bought it off a dealer lot. If you are happy with the car, why not. You could end up saving quite a bit on finance charges. However, you have to lease a car that did not have a pie in the sky residual to begin with. As tempting as they are, I am wary of lease contracts with unreasonably high residuals in the event that I might need or want to purchase at lease end.

  • avatar

    So much misinformation in this article.

    If you have access to good credit, I cannot make leasing add up. We do 6,000 miles per year, self employed, line of credit at 3.2%.

    We just purchased a CPO X3 that will cost us in the region of $500 to $530 per month if we flip it in 36 months, all costs considered. Leasing was well over $800.

    That’s a HELL of a delta and the vehicle is warrantied for the 36 months.

    • 0 avatar

      CPO leasing to date has not featured attractive terms. You might get a different result if you were looking at buying a new X3.

      • 0 avatar

        CPO leasing? i never mentioned that, i used a line of credit.

        • 0 avatar

          You said you bought a CPO X3, so I assumed you were comparing to a lease of the same X3. If you’re comparing CPO to new, that’s kind of apples and oranges. And in the US a lease deal on a new X3 would be a whole lot better than $800/month.

          • 0 avatar

            I did, and it is not apples and oranges because in both cases the car is warrantied and you’re flipping after the term.

            Only issue is if you can find the options you want.

          • 0 avatar

            dal, It depends on the X3. An Xdrive28 with navigation and a big sunroof, but no other options – no leather and no metallic paint – has a lease pymt of $553 with $3425 down. So it’s $648/mo. for a lightly equipped X3.

            Add in fancy paint, fancy leather, fancy driver’s assistance beeps, cold weather stuff, premium package stuff and you’re now at $725/mo.

            These numbers are before tax so it’s not tough to get to $800/mo for an X3 lease

            And this is for the x28. The diesel and x35 are more still.

    • 0 avatar

      I wouldn’t call it misinformation. Leasing isn’t the smartest choice for everyone, especially someone driving just 6,000 miles/year..

      • 0 avatar

        Any time i break out the spreadsheet, the only time leasing makes a lick of sense is if you do above average miles, tend to abuse your car and do not have access to cheap credit.

        Up here anyway, the leases are just too damned expensive, a moderately loaded X1 was in the mid 700’s per month, so on a 3 year lease that is over $26,000 spent and i have to hand the keys back. It’s utterly insane.

        Truth is, people like leasing because it’s nice to have something new and it is an easy transaction, it makes no sense for most individuals in Canada anyway.

        One last thing, as in the tradition in the US and Cananda, one needs to look at all costs. Yeah $300 a month sounds good but you can be dinged $2,500 on delivery and other dealer fees, ya gotta roll that all in to get a true comparison to financing CPO.

    • 0 avatar
      Steve Lynch

      I would like to see your math on spending $500 per month for three years on a retail loan on a CPO X3.

      • 0 avatar

        Here it is …

        2013 35i, pretty much loaded. Drive away at $42,000, CPO, fresh tyres and brakes etc etc. 20,000 miles on it.

        We drive 6,500 miles per year, rolled it into the HELOC at 2.2%. All numbers over 36 months.

        Depreciation: $15,500
        Maintenance: $1,200
        Debt Servicing: $2,700
        Cost of selling private estimated at 90% of retail (so in essence more depreciation): $2,500

        Total tax claims (self employed) at a 50% usage claim and highest tax bracket: $4,000

        We right around $500 a month.

        After severe haggling best dealers could do new was $741 a month to lease once i took into account tax claims which are actually higher with a lease.

        Even if my math is off 20% (it isn’t) we are still miles in front.

        • 0 avatar
          Steve Lynch

          Unless you wreck your car and thus have take the hit at trade/sell time (even if the repair job is good) looks like you are ahead. Not to mention miles ahead of the average consumer.

          • 0 avatar

            To be frank, i was kind of surprised the dealer took $42k with CPO rolled in. It skews all the numbers.

            It was listed at $38k which is $43,000 with taxes but CPOing it is usually a few grand, at least three.

            We had a WAILING baby in the office and a fidgety 4 year old, so the sales guy asked for a number and I said “chief, we really do have to go, if you can do me $42K out the door, CPO’d with fresh rubber and brakes we will take it now, otherwise we will have to keep shopping”. He pretended to go talk to someone and said it’s ours.

            Fresh rubber makes a real difference, damned things are $1,200 retail.

  • avatar

    “At the end of three years, the point at which most people trade their cars”

    Steve, do you have some supporting data for that? Everything I can find says it’s somewhere between six and seven years.

    As an aside, I must live in a different part of the world, because it seems like everyone I know is on the “buy and hold” plan. I had my last two cars 10 and 12 years, and almost everyone I know keeps cars a minimum of eight years. We traded my wife’s eight year old Odyssey a couple of years ago, and one of my friends was giving me the third degree about why we turned it loose so soon.

  • avatar

    I’ve leased one car. Honda Accord 2103. Just turned it back in.
    Only downside we had was car damage. That exists regardless of lease. But I had to fix it or take a charge of what HFS would say the damage costs.

    1. No money down.
    2. 35 payments for 36 months
    3. 12,000 miles a year was plenty. But one can add on more, and know the price per month as well.
    4. turn in was simple. No additional fees.

    Due to needing to spend less on cars (bought TWO MORE), I down-graded to 2011 Camry for $6700. Runs fine. Rides BETTER than an Accord.

    We found Accords beat us up too much in harsh ride quality. Now we have three Toyotas.

  • avatar

    Rent-a-life culture is poisoning our existence. Leasing is nothing more than a car subscription with no end. To be honest, I can’t believe there is not more powerful incentive laden market mechanisms to deter people from buying cars and using them for 15 years. Every industry is transitioning towards a more contracted consumption model that only serves to squeeze the middle class into leisurely but indefinite servitude. A world where market share is the primary driver and not buy-it-for-life quality. While many income levels can easily afford to enjoy the luxuries of the constant 2 year product cycle it is philosophically incorrigible.

    • 0 avatar
      Testacles Megalos

      It’s bigger than that. Technology has progressed to where no regular person can really understand how the stuff they can buy works, unlike a century ago. If you don’t know how it works, I’d argue you can never really “own” it anyway. The masses have been convinced by commercial (e.g. ads and media) and gov’t (e.g. public schools) interests that knowing how things work is generally pointless anyway – I’m guessing with the full realization that a disposable society means one made of constant consumers. Not only philosophically incorrigible, it’s not sustainable on a number of levels.

  • avatar

    I guess in some cases the numbers work to lease, but I just can’t wrap my head around basically renting a car for three years. But that’s my hang-up to deal with.

    Meanwhile, where do I sign up to lease that “dramatically exciting” 1977 Mark V with “unsurpassed elegance?”

  • avatar

    I’m really on the fence with the leasing thing. I can and do wrench and have had decent luck with all of our used cars since we started driving again. I feel like used cars have never been more durable or robust than they are now, and it’s still pretty easy to avoid all the electronic insanity that will go before the mechanicals if you choose wisely. Leasing does make buying a new car more palatable but I’m just not sold on the whole new car thing yet.

  • avatar

    You know what I like about paying cash for my cars? It’s simple. Write a check and drive home.

  • avatar

    Leasing is advantageous:
    1- If you have an accident that shows up on an accident report your owned vehicle will have additional depreciation.
    2- Manufacturers have monthly programs/incentives they all practice dynamic pricing in one fashion or another which can impact the trade value of your owned vehicle.
    3- With increased technology, there is increased disposability built into any vehicle.
    4- Leasing alleviates or removes the risk/reality of being “upside down” on a long term loan.
    5- The auto industry functions on a 36 month cycle, not 60-72 or 84, the folks in an 84 loan are “pulled ahead” by the dealer around the 36 month mark – roll over deficiency for close to the same monthly and into a new vehicle.
    6- The vast majority of folks are making a monthly payment be it a lease or a finance term. They keep on making monthly payments.
    7- The Germans have capitalised on leasing for decades now, moves new metal, and they remarket the lease returns as CPO.
    8- Residual values on new vehicles are “supported” by the manufacturer to arrive at a competitive lease payment.
    9- Leasing is excellent for the auto business, sell it new, and sell it again as a CPO = sell it twice.
    10- Manufacturers support the lease rate, and often the residual to move new iron- Want to move a new German model support the rate, not enough support the residual too.
    11- The captive finance arm will agree on a rate with the marketing arm (manufacturer) factor in a profit for the finance arm, an amount for residual risk, and set a residual, then the marketing arm will raise the residual by enough points to be competitive and assume the risk of those additional points.
    12- A dealer must participate in the manufacturer supported CPO program must buy his share (quota) of lease returns.

    Why would you want to own a new vehicle full of technology that will run out of warranty half way down the finance term?

    • 0 avatar
      Testacles Megalos

      You nailed it; cars are disposables now and in many cases becoming highly interchangeable appliances made of parts sourced from a community of generic suppliers. The pretense of keeping one “forever” and maintaining/repairing it into the next century no longer resonates.

      The lease payment has to be viewed as season tickets – – you pay a fee for a certain privilege. Go enjoy it, you’ve got your reserved spot, and then get up and leave when the performance/game is done. Was it money well spent?

      • 0 avatar

        Not unless there are additional advantages (i.e. tax deductions).

        • 0 avatar

          That’s a good point. I’d love for Bark or Steve to sketch out the general guidelines for tax deduction on leasing.

          I’m driving enough miles per year for business on my personal vehicle that I am getting a deduction. That’s made me wonder if I would be eligible to deduct a certain percentage of a lease and if I would be restricted to certain types of vehicles if I did that.

          • 0 avatar

            Over here you can claim up to $800 a moth on a lease and if purchasing you can claim the depreciation up to $30,000 of the purchase price.

            Thing is though, the real savings are bugger all.

            $800 x a 50% useage claim X 48% tax bracket = $192. So roughly 24%.

            Don’t spend that all at once.

          • 0 avatar

            In Canada the lessee pays taxes on the portion of the vehicle that is used, not on the portion that is not used (residual).

            Ex: 2K down payment on a lease is taxable, if the down payment is a trade in its not taxable the monthly is 500 there are taxes on the monthly, the residual is 20K not taxable.

            Business deductions for using a vehicle are capped to an amount if owned or a monthly if its leased. Basically you can use a 100K vehicle or 1K per month lease for business but cannot deduct from 100K or 1K.

  • avatar

    I understand why some people want a new car every three years, but I’m not one of them and so I don’t feel much need to consider leasing.

  • avatar

    Leasing versus buying is very simple from a taxation point of view:
    In California the average sales tax is 8%. On a purchase where you “write a check for it” you lose $3,360 on a $42,000 Ram 1500 SLT. That money is gone forever and Governor Brown now has more cash for his “bullet train to nowhere”.
    Our lease payment of $338 plus tax shows an expenditure of $27 per month for taxes. You could lease for 124 months to equal the taxes paid by the “gotta own it” crowd.
    Lease new, Buy used…

    • 0 avatar

      In my state you would get some of that $3360, ok $4120 back IF you trade it in on another vehicle at a dealership. Or if you had a trade you wouldn’t have payed all that up front in the first place.

      If for example if you traded in a vehicle that they credited you $10K for you would only pay the sales tax on $32k instead of $42k. Then when you trade that one in you’ll get a credit for its trade in value.

      Of course the car dealers lobbied hard for that as it does make it more attractive to trade in a car instead of selling it privately.

  • avatar

    There’s a lot of good information in this post as well as the comments by AGR and Alfisti, although the latter has an unusual situation.

    I think a lot of the resistance to leasing comes from people who can’t deal with the concept of having to give the car back (but there’s no equity! they say) at the end of the lease term. I’ve looked at leasing for each of the dozen or so cars that I’ve bought new, but in every situation the residual has been worse than my estimation of the car’s value at the end of the specified term.

    An interesting situation comes up with private banks that offer leases in which the bank sets the money factor, but the buyer sets the residual and lease duration. I’ve seen this done on extreme high-end cars – MSRP $200k and up – with money factors like 0.002, residual 10%, and lease duration 24 months. Obviously the monthly payment is very high, but since the company pays the lease cost pre-tax, the business owner can simply buy the car at the 10% residual post-tax at the end of the lease term. Again an unusual situation, but it’s a nice way of making the deal work for the right buyer.

  • avatar

    The money factor IS the interest rate, plain and simple. However the interest rate/money factor is not the APR which takes into account things like that $750 acquisition fee.

    So no you just can’t multiply the money factor to determine the effective APR you have to include the acquisition fee in the calculations to get the APR. The fact that you are not eventually paying the balance in full is not why you can’t calculate the APR from the money factor.

    Both a loan and a lease amortize the cap cost/purchase price over a fixed period of time to a fixed value. The difference of course is that a loan amortizes to a zero balance while a lease is usually for a shorter period and amortizes to a non zero number. When you lease the money factor is applied to the full cap cost so you are still paying “interest” on the full value of the vehicle, less any down payment. However with a lease you also need to factor in the imputed interest of that acquisition fee. Yes your total interest payed will be less on the lease but of course you are guaranteed to have nothing at the end of the lease. At the end of the loan the vehicle may still have a non zero value and you can recoup that value by selling that vehicle that you actually own.

    If you want to drive a new vehicle every two or three years then leasing can be good deal. If the mfg is subsidizing a lease at that point and time and are putting more money there than they are in purchase incentives then it can be a better deal for the average person IF you stick within the allowed miles and you don’t tend to trash your vehicles. Otherwise you can be stuck at the end of the lease with not only having to put money down on your new lease but also paying that excess mileage, wear and tear penalties too.

  • avatar

    Looks like everyone has their opinion on this and it doesn’t look like anyone changed their minds. The only solution I can see is for someone to buy a car and look at the 3 ways, lease, loan, cash and see which is cheaper.

  • avatar
    Dan Slob

    Dumb question, maybe – why do the more expensive model variations have lower % residual values?

    • 0 avatar
      Steve Lynch

      At the least in the Mercedes world on super high end cars, if a customer can afford a $125,000 three-year-old used car he or she could afford – and probably prefer – the same car brand new at $180,000. So how low did that used car have to go to be attractive? Probably $90,000 or $100,000.

  • avatar

    When I was in the business, I tried to encourage my dealers to partner with a local bank and offer the leases in house. Mostly for their gold plated designates, of course. They knew the users better than I, especially if they were repeat buyers. It went against corporate policy, but a well-funded and performing lease portfolio was an income stream ignored by many who could afford to self-fund. Subvented rates were always going to be offered by the credit captives, so they always had a back-up plan. I was always an advocate for my guys making every penny they could. And still made my bonus. Win-win-win. I would also guess if you showed every number to to all customers, it would be Greek to 90%. Money factor? What’s that? I would guess most would ask.

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