Auto Leasing Secrets
Are you thinking about getting a new
car lease instead of a conventional car loan? Before you do, be sure
to learn how leasing works and how a greedy/dishonest dealer can use a lease to rip you off for thousands of dollars.
On this page you will find a brief explanation of how leasing works along
with the most common overcharges and outright
rip-offs that have been found at many car dealers across the country.
Be sure to read How
I Bought A Popular New SUV for $3,611 Below Dealer Invoice.
New car leasing is basically a
long-term rental contract with an option to purchase at the end. The
monthly payment is based on the purchase price (cap cost), the down payment
(cap reduction), the term
(length of lease), the finance rate (money
factor), and the
residual value. Any one of these items can reduce the monthly payment: a
lower cap cost, a
bigger cap reduction, a longer term, a lower money
factor, or a higher
So if you fail to negotiate a lower purchase price, your
lease payments will be higher. (Smart shoppers always negotiate huge
discounts off the purchase price, whether they are leasing or buying.) For
a more detailed explanation of how lease payments are calculated, see
Car Leasing Part 2.
Deceptive Lease vs. Buy Comparison #1
To trick people into a new car
lease, dealers often use deceptive comparisons that are designed to make even
bad lease deals look better than conventional purchases. Instead of
comparing lease payments to 5-year loan payments (the term that buyers
commonly choose), dealers often use the higher payments on 3-year or
4-year loans to make the purchase look a lot more expensive. Don't fall for
Deceptive Lease vs. Buy Comparison #2
Another trick that's used in deceptive
comparisons is the quoting of inflated (fictional, made up) loan payments -- again, to make a
purchase look a lot more expensive than a lease. For example, if the real
monthly payment on a purchase with a 5-year loan is around $400, the
dealer might say, "Your loan payment for a conventional purchase would be
over $600, but a lease payment would only be $399 for the same car."
To an uninformed shopper, that lease might sound pretty good, but it's a
horrible deal! The monthly payment to lease is the same as the payment to
Inflated lease payments may
also be used, with the "extra" money going towards a secret
price or APR increase. Since few consumers understand how auto lease payments
are calculated, many have agreed to leases with monthly payments that were
inflated by $75 to $100 or more. (And that's why you should always figure
out your own loan and lease payments.)
The "Down Payment/Cap
Down payments (cap reductions) are often required on
car leases to make bad deals look good. Don't fall for this! A cap
a lease is nothing but "monthly payments in advance," and the
more money down, the greater the chance that a car lease is good for the
dealer, but not for the customer. (In a lease, a down payment doesn't affect
the residual or build any equity, it just lowers the monthly payment.)
For example, an advertised "$299 per month" 30-month lease based
on $1800 down is the same as $359 per month with no down payment. Be sure
to analyze all leases based on no down payment (no cap reduction), and
learn how to figure out your own payments so you're not ripped off!
The "MSRP for Cap Cost"
Even if they're lucky enough to
escape the dishonest sales practices, the typical auto leasing customer fails
to negotiate the price and terms, resulting in the loss of thousands of
dollars on each lease transaction. For example, an informed buyer might
only pay $18,000 for a car with a sticker price of $20,000. However,
someone else who leases the same car at the terms offered by the dealer (usually at the sticker price) would end up with monthly payments about
$67 higher (on a 30-month lease) than they would be if the auto lease was
negotiated down to the $18,000 sales price.
When shoppers try to negotiate a lower purchase price (cap
cost) on a lease, some dealers will say that they have to use the MSRP in
all their leases. This is a lie. If they refuse to negotiate on price,
find another dealer who will.
The "Ownership & Equity"
No matter what a dealer says,
there is NO ownership or equity in a lease unless the purchase option is
exercised at the end. (This typically costs about 50-60% of the original
purchase price, or about $15,000 to $18,000 on a $30,000 car.) At the end
of a lease, there is typically no equity unless the buyer negotiates a
huge discount off the purchase option price. Remember this: a lease is
just a long-term rental, it is NOT "another way to buy."
Should you lease first, then
buy at the end?
No, this is usually a bad idea because a good lease
always has an inflated residual, which means that the vehicle will be
worth a lot less than the purchase option price. So if you are thinking
about buying, do not lease first. And if you are already leasing, you
should probably turn the car in at the end of the lease. Buying at the end
only makes sense if you can negotiate a huge discount off the purchase
Is leasing cheaper than buying?
In most cases, leasing costs more than buying over time. Why? Because the
most expensive part of car ownership is depreciation. Most new cars lose
at least 50% of their value in the first three years, then depreciation
tapers off. So if you are leasing a new car every three years, you will be
paying for that huge depreciation hit over and over again. You will also
be paying all the up-front costs of a new car (tax, title, license,
registration) and the higher cost of insuring a newer car every three
years. Those "new car costs" could easily add up to $3,000 to
$4,000 (or more) every three years.
If you were to buy and
keep a car for a least six years, your depreciation costs over time would
be lower and you could avoid those "new car costs" for at least
three years. You would also have a dependable, paid-off car that you could
keep, sell or donate.
So when is leasing cheaper than buying? When the lease
payment is only $200 to $250 per month for 36 months, with no cap
reduction (down payment). If the lease payment is higher than that, or
there is a cap reduction that is hiding a higher monthly payment, then it's probably
cheaper to buy.
Can I get out of a lease early?
Yes, but it's going to be expensive. You will have to pay an
early termination penalty plus the difference between the current market
value of the car and the amount of depreciation that you have paid on the
lease. So if the residual was inflated (and it probably was), you could be
"upside-down" by $2,000 to $3,000 or more. For example, if the
early termination penalty is $250 and your lease is upside-down by $2,500 you
would have to pay $2,750
to get out of the lease early.
If you think you can just find someone to take over the lease
payments to avoid the early termination penalty, that may be a lease
violation that triggers a repossession (with a huge ding to your credit).
Be sure to read your lease before trying this. If they allow this at all,
the leasing company will usually have to approve of the person who is
taking over the lease.
Smart leasing practices:
lease longer than 36 months. You don't want to be paying for repairs on a
leased (rental) car, so make sure that the warranty covers the full lease
2. To compare leases on the same car at different dealers, add the
cap reduction to the total of all monthly payments for each lease. The
lease with the lowest grand total is the best deal.
3. Don't fall
for the "cap reduction & lower payment trick" where the dealer uses a big cap
reduction to fool you into thinking that you're getting a good deal. A cap
reduction is nothing more than "monthly payments in advance" --
it is not a refundable deposit.
4. Be sure to get gap insurance. When a vehicle is totaled in an accident,
insurance companies only pay for replacement value of the vehicle, which
is usually thousands less than you owe on the lease. Gap insurance will
cover the difference, so you will get paid enough to cover the balance due
on the lease.
5. Remember that everything is
negotiable, including the money factor (lease rate) and the purchase price.
Real Leasing Example - Analysis:
At the time of publication, we saw a "Special Offer" of a
36-month lease on a popular new pickup truck. The monthly payment was $249
with a cap reduction (down payment) of $2,750. The monthly payment sounds
great, but that cap reduction is
hiding the real monthly payment - $325 with zero down. (Divide the $2,750
cap reduction by 36 months and you get $76, which is the hidden monthly
That dealer knows that $249 per month is an attractive lease
payment, but they want people to pay a lot more than that, so they use the
"cap reduction trick" to hide the real lease payment, which is
$325 with zero down.
Without that cap
reduction, a $249 lease payment would be a good deal. Not a great deal,
but a good deal. (A great deal would be $200 per month with zero down.)
Why should you analyze all leases
based on zero down (no cap reduction)? Because leasing is a long-term
rental, there is no ownership. So the most important thing is how much you
will be paying per month to lease (rent) the car or truck. Using a cap
reduction just hides the real cost.
Be sure to see our Car Buying FAQ
page for answers to common questions that people have about buying and
Money Saving Tips--
To get the best possible deal on a
new car or truck, do all of your homework before signing any
contracts or putting any money down. Dealer tricks (like secret APR
increases, packed payments and other common rip-offs) can quickly erase
any discounts or other savings that you think you're getting, so learn how
to calculate your own monthly payments. Use the Internet to get at least
5-6 quotes before you start negotiating with dealers. For free (no
obligation) quotes on new cars and trucks, use Edmunds,
You still need price quotes if you're going to lease, because the price is
used to calculate the monthly payment and cap reduction. (A higher price
means a more expensive lease.) To make sure you're not missing out on a better deal, get quotes from all
If you're thinking about negotiating your
own new car lease with a dealer, be sure to use
Expert Lease Pro software. The dealer will be using his software to maximize
his profits (at your expense), but you can protect yourself against
overcharges by analyzing the deal before you sign any contracts. See their
Be sure to see our
Money Saving Tips page for more new
car buying information and resources.
"Leasing" or "Fleecing"?
Most dealers have been telling
prospective car buyers that car leasing is a great idea. Well, they're half
right -- it is great for dealers. On average, dealer profit on a new car lease is
twice that of a conventional purchase. Even better, customers who lease
usually have to return the cars in 2-3 years, giving dealers more chances
to make huge profits off the same people. So why is it called
"fleecing"? Because, even though some people do end up with good
auto lease deals, many have been victimized by outrageous overcharges.
Since most people don't understand how a car
lease works, dishonest dealers have been able to take advantage of
consumers by using deceptive lease-vs.-buy comparisons; quoting lower
prices or interest rates, then using higher ones in the lease; and quoting
higher trade-in allowances than people actually receive. Since full
disclosure is not yet required by law, few people have known the crucial
details of their lease transactions -- and even fewer realize that they
have been cheated.
In 1995 ABC's PrimeTime Live did an
undercover investigation that found deceptive leasing practices being used
at five out of the ten dealers they visited. That same year, a statewide
investigation in Florida resulted in 55 Toyota dealers and their
distributor setting up a $4.5 million restitution fund to settle
complaints of overcharging on car leases. (Other leasing investigations are
now under way in 22 states.) On May 14, 2000 KCBS-TV announced the results
of its three-month undercover investigation of 14 new-car dealerships in
Southern California. Some of the biggest dealers in America were caught
red-handed by hidden cameras -- lying, cheating and overcharging customers
on new-car leases and purchases.
The Secret Price
Increase (The "Flip")
The "flip" is a common
trick that's been used to overcharge many people on a new car lease. After a buyer
agrees to purchase a vehicle at a negotiated or advertised discount from
MSRP, the salesperson convinces them to lease the vehicle instead --
"to lower their monthly payment." Before cap cost (price)
disclosure was required, a dishonest salesperson would simply use a
non-disclosure lease to secretly raise the price of the vehicle. These
price increases were typically $1,500 to $2,000 (some were $5,000 or
more), and victims rarely if ever discovered the overcharges.
Now that cap cost disclosure is required by
law (nationwide as of 1/98, two years earlier in a few states), secret
price increases are more difficult to pull off. However, some salespeople
have been so bold (and so greedy) that they have attempted it, anyway --
and succeeded. Most people don't understand how
works, so dishonest salespeople can still get away with price hikes by using one of
the following tricks.
First, using a cap cost in a new car lease that's
higher than the negotiated (or quoted) price is not even noticed by some
people because they don't know what cap cost represents. (It's the
"selling price" of a vehicle that's used to calculate lease
payments and it's supposed to be the same as the price that was
negotiated, quoted, or advertised by the dealer.) Second, if a higher cap
cost is noticed, the salesperson might say that that figure has no effect
on their monthly payment; they're not buying the vehicle, the leasing
company is; and the cap cost is set by the leasing company so it's not
negotiable. (Those are all lies.) Third, a higher cap cost is sometimes
explained away by saying that it includes finance charges (another lie).
Since most people are used to paying thousands of dollars in interest on
car loans, this lie sounds believable.
More New Car Leasing Resources
How to avoid common rip-offs, how
lease payments are calculated, and how to get great new car lease deals. See
Leasing Secrets 2: How to Get Great Lease Deals.
Lower Payments, Higher
Leasing companies love auto leasing
because it usually allows them to make a lot more interest on every car
they finance. First, since they're not required by law to disclose the
effective APR that's being charged, they don't disclose it. Because of
this loophole, a lot of leasing companies have charged higher interest
rates on auto leases than they have on loans. (They have to disclose those.)
Second, since less principal is being paid off in a lease payment, total
finance charges on a lease will usually be higher than they would be on a
loan -- even when the balance, term and APR are the same for both.
For example, on $20,000 lease and loan
balances, at 8% for 3 years (50% residual on the lease), total finance
charges on the lease would be $3,608. On the loan, total finance charges
would only be $2,572. So you would pay $1,036 more in finance charges on
the 3-year lease than you would on the 3-year loan. In fact, the finance
charges on this 3-year lease are just a little less than the total finance
charges on a 5-year loan (same balance and APR). Worse yet, since lease
residuals are often inflated by lenders, and lease charges are based
partly on the residual, many car leases will have higher finance charges than
our example because it had a conservative residual.
The bottom line: Paying off less principal
in a lease lowers the monthly payment, but it also causes higher finance
charges. This is why credit card companies encourage people to make only
minimum payments -- the lenders get more finance charges that way. And
that's one of the dirty little secrets of leasing: It's the
automotive version of minimum payments on a credit card.
Money Saving Tip: Don't overpay on a new car or truck! Learn how
to get the real
dealer cost numbers (plus other car buying and leasing
secrets) by reading our New
Car Buying Tips page.
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