I’m thinking about getting a leased car but I owe on my current car loan. How do I get a good deal on a lease? What are residuals? What are buy backs? How do you buy your car once the lease is over if you don’t give it back? I’ve only ever bought cars and never leased because I don’t know how they work and not get ripped off. I’ve Googled but I still don’t get it.
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Typically leases are for people who want to get a new car every few years. After your lease term is up, usually 3 years, you can then choose to trade it back for a newer car or buy it from the dealer. Typically you wouldn’t want to lease to own since you will be paying more for the car in the long term. There’s a little more to it than that but I simplified it.
A lease is essentially a long term rental.
Your payments for the lease are essentially the depreciation of the vehicle during the term of your lease.
Your residual is the value of the vehicle at the end of the lease.
Once your lease is over, you are given the opportunity to return the car or you can choose to buy it.
Your buy out price is your residual value. Please note that your residual is set in stone the moment you sign your lease. There is no re-negotiating it once you’ve signed the paperwork.
Keep in mind that leasing to buy is rarely cheaper than buying right from the start. You have to compare your residual value to the cost of used cars on the market because that is essentially what you have, a used car.
Sometimes it works out that your residual is lower than comparable used cars, sometimes its higher.
Keep in mind that this is a used car at this point, so if you decide to finance it, you are getting used car rates, none of that 0-3% interest rates.
Finally, if you do decide to lease, do not put down a down payment. It may reduce your monthly costs but if you total that car, your payments are a wash.
Remember you don’t own this car, you don’t have equity in it technically. If you smash that car a week after taking it, you are only out whatever money you put into it, including your down payment.
This is one of the nice parts about leasing, if something happens to that car, you can wash your hands of it and get another one, rather than being on the hook for the rest of your loan.
So, leasing is basically financing the estimated depreciation over time. Example. You want a 2 year lease on a $30k car. The dealership estimates that the car will be worthy say $20k after two years (they drop quick at the beginning). Your lease then is basically $10k/24mo or ~$420/mo. They’re going to throw some finance charges or whatever in there so it’ll probably be more, but that’s close enough.
When your two years is up, you bring it back to the dealer. They assess the car and if there’s anything they don’t qualify as normal wear and tear (thus negatively affecting the price they’re about to get from reselling it), they’ll charge you extra. You will generally have the option to buy out the rest of the depreciated value if you’d like at that point. Things they’ll mark off for include but aren’t limited to: mileage (typically over 10k mi/yr though it varies), paint scratches, dents, stains, non normal wear, etc.
People will sometimes do leases if they always want something new. Cars being leased for 2 or 3 years will always be under warranty and they’ll never have to worry about getting new tires, failing inspections, defects, and some leases cover all maintenance costs.
On the flip side you’re always paying and at the end of the lease you turn in the car and walk away, so you paid for two years with nothing to show for it. If your someone like me who pays off a 5yr loan and then keeps the car for 10 more years, leasing is way more expensive. If your someone who likes having the newest car all the time, it’s a lot less hassle to lease than buy as long as you don’t go over their mileage limits and keep your cars clean and scratch free.
Edit: fwiw, a $30k car with no down payment and 60 month financing is $500/mo for a normal loan.
You may want to check out Jalopnik’s series of articles on leasing (just search “Jalopnik Lease”).
I lease so feel free to ask me questions. You can get a good deal on a lease if:
* you put down more as a down payment (do that math)
* you have excellent credit
* you have an existing relationship with the dealership
* you catch on their major holiday sales
* you play hardball and are willing to walk away
> What are residuals?
So you’re basically renting a brand new car. If the car costs $10k and after your lease the car has a buyout value of $6k then $6k is your residual – i.e. the *residual* value left of the car when your lease is over.
> What are buy backs?
The dealership can end your lease early and “buy back” the amount left on your lease. This is good for them in case your car is in great condition with fewer miles. Plus they make more money from you if you get another lease.
> How do you buy your car once the lease is over if you don’t give it back?
It’s written into your contract and the buy price is part of that contract. You just tell them that you want to buy the car and I’d do it 3-6 months before your lease expires and that’s it.
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