All Things Car

Plain talk help about buying or owning a vehicle, from shopping tips to ownership information and more

Archive for the month “November, 2011”

Should I Lease? Part 2 of 3 ~ What happens at the end of my car lease? – A discussion of your lease-end options

     As I mentioned last time, todays vehicle  leases are “closed end” leases.  What that means is that the residual, or lease-end value we discussed last time, is guaranteed by the lease company.  This guarantee opens up options for you as your lease expires.  Here’s where the fun begins!   With options at the end of a lease, this financing option becomes a viable option for a majority of car buyers to at least consider.

     The option most people are familiar with is the option to turn the vehicle in at the end of the lease.  That means you make your payments every month (or one payment up front, in a “single payment” lease – more on that later), paying your way down to the predetermined lease end value.  At that time, if the car is worth that value, or less, you get to hand the keys back in, pay a small disposition fee (often waived, if going with the same car company and lease company again) and pick out your next car.  While there is no equity with this option, and you are walking away from the payments you made, you are also not in a position where the car is worth less than you owe, and therefore have no money from your old car to roll into your new financing.  As long as you haven’t driven more miles than paid for in your contract, your maintenance is up to date, and you have no abnormal damage or wear & tear to your vehicle, you are free and clear of your obligation to the old car.

     Before turning in your old lease, however, it may be worth your while to check the market conditions.  The residual value is printed on your lease contract (hopefully you kept it), or would be available from your dealership or lease company.  It would be a good idea to see what dealerships would pay for your car.  If they will pay more than the amount on your contract, the extra money is yours!  Sell it to them.  They’ll send the residual amount to the lease company, and can write you a check for the remaining balance, or apply it as down payment toward your next vehicle.  Here’s the thing, though.  When you are getting this figured out, find out how much they will buy your car for, even if you don’t get anything from them.  Some dealerships will try to use discount from the car you buy (that they can give you anyway) to make the value seem higher than they are really paying.  Don’t fall into that trap.  Get the amount they will buy your old leased car for, and then look into a car you may be interested in purchasing.

     As long as we are talking about selling your car, some people choose to sell their car to a private party.  This is an option open to you as well.  Be aware that, depending on state tax laws, you most likely have not been taxed yet on the residual amount, so if you do it wrong, you will have to buy it out, pay the taxes and fees, and then sell it to the customer.  But there is an option.  Many dealerships, if you are buying your next car from them (and especially if this is the dealership you leased your old car from in the first place) will allow you to bring in your customer to buy your old car from the dealership, rather than straight from you.  In this case, as a reseller, the dealership buys out the lease, pays no sales tax on that amount, sells it to your customer at your agreed-upon price, and collects the taxes and fees only from your customer.  The profits above your residual are then given to you (again, typically as down payment on your next car, but can be as a check).  Many dealerships will not take a cut of your profits in this transaction, since they are selling you a new car in the process, and sold you the old one as well.

     But what if you like your car, and would like to drive it a few more years?  What if you like it more than the new cars you are looking at, and don’t want to give it up or sell it yet?  Again, this is your option.  Most lease companies also offer car loans, and would be happy to send out loan documents for the residual amount (plus taxes and fees for your state), setting up the loan balance into monthly payments similar to your old lease payment.  Then you just keep making payments until you pay it off.  In fact, many people lease their car when it is new, knowing full well they will choose this option when the time comes.  With the low rates and low payments offered on a lease, this can be attractive, and it offers an “option point” in the middle of the ownership experience, in case needs or wants change, and they decide a different vehicle is desirable after just a few years.

     Whichever option you choose, the fact that you can choose is the great part.  If you simply take out a long term loan to make the payments affordable, you have no options until the loan balance catches up with the depreciation, or until you decide it’s ok to roll the negative equity balance into your new finance contract.  If you decide to lease your new vehicle, at the end of the lease, which option fits you is completely up to you.  Want to keep the car, and the residual is a good value for a car like yours?  Turn it into a loan and keep driving it.  Needs or wants change and you decide a different car is in order?  No problem!  Do you have a buyer for your car, or can the dealership pay you a profit at lease end?  Go ahead and take advantage of it.  It’s all up to you!

     But should you lease in the first place?  We’ll take up that conversation next time.  Thanks for reading!  I hope this helps.  Questions?  Just ask!  And happy shopping.

Mike Bidwell
Mankato Motor Co.


Should I Lease? Part 1 of 3 ~ What’s all the fuss about leasing? Why would I lease my vehicle? What is it anyway?

Lease Keys

You can’t hardly watch TV, listen to the radio or read an article these days without one car company or another touting the latest and greatest lease payment.  But should you lease?  Should you stick with the traditional loan?  What are your options, and why do so many people talk about leasing anyway?  Over the next few weeks, I’ll discuss several aspects of this mysterious topic.

For today, let’s start with the basics.  Just what is leasing?  Basically, a lease is simply another way to finance a car.  We all know some people pay cash for a vehicle, and we already know how that works.  Other people take out a loan with their bank, credit union or through a lender the dealership connects them with.  Again, we are familiar with this.  Still others use their home equity line to pay for a car.  I don’t typically recommend this option, but that’s a discussion for another day.  Leasing is very much like financing, but with options built in at the middle.  You can decide after only a few years if you want to turn it in, sell it or keep it.  At the end of the lease term, your obligation is over, if you want it to be.

Leasing simply works like this.  Based on recent history, the lease company figures what the vehicle should be worth at the end of the lease.  That dollar amount gets set aside.  Your payments are on the difference between what you pay for the car, and that amount that has been set aside, plus the cost of funds (interest).  In the most basic terms, that’s a lease.  Many people have the misconception that leasing is like renting, but this couldn’t be farther from the truth.  The idea behind a lease is to pay just the depreciation on the car, rather than paying for the entire thing.  They know what it should be worth at the end, guarantee to you that it won’t be lower than that amount, and month by month, you pay the balance down to that amount.  After that, you decide what happens next.

The biggest advantage to a lease (other than affordability)  is that leasing gives you options.  At the end of the lease, you are completely in control of what happens.  You can choose to turn the car in and walk away from the car, the manufacturer and the dealership, if you so desire.  You can sell the car to a dealership or to someone you know, and potentially make some money at the end.  Or you can choose to continue to drive that car, if it is still the car you want to drive for a few more years.

The key to these options is the dollar amount we discussed earlier that has been put aside.  The lease company figures out that a car like this, that is this old, with this many miles is typically worth this amount to a dealership.  This figure is called the “residual.”  By establishing the residual value of the vehicle, you now know the projected depreciation of your car or truck.  Your monthly payments are not going into the wind, as if you were renting the vehicle.  Every payment is paying down the balance closer and closer to the residual.  At the end of the lease, you have paid your vehicle down to that dollar amount.

In the past, leasing gained a bad reputation, with some companies writing “open end” leases.  They got to arbitrarily pick a number out of the air to be the residual.  If the car wasn’t worth that at the end of the lease, that was your problem.  This put a lot of people into a lot of hurt, and caused them to never want to hear the word “lease” again.

These days, leases are “closed end” contracts.  Here’s where the magic happens.  When you lease your vehicle, the residual is guaranteed.  That means if the car isn’t worth what the lease company figured it would be, that’s not your problem – it’s theirs.  You get to hand them the keys and go get something else.  No questions asked.  No strings attached.  Thanks very much.  It’s been fun, but I’m going to drive (insert vehicle name here ) now.

The most common complaint I hear from people is due to a lease that wasn’t set up right.  A lease should be structured to fit how you drive, rather than trying to fit your driving into a lease.  If your lease doesn’t include enough miles, you will feel like you shouldn’t drive the car, even though you are making a payment every month.  I would rather set up the lease to have more miles than you need, so you feel like you have miles to burn, and don’t have a fear of “going over.”  If you drive more miles than you contracted for, the lease company will bill you for the extra miles.  This means if you drove 1000 miles more than you paid for in your payments, they will charge you about $150 at the end to compensate for those miles (check with your dealer for lease end cost – I used 15 cents per mile).  Additionally, at the end of the term, if you have a dent in the fender, or a hole in the bumper, you should have that fixed (insurance?) before turning it in, or they will bill you for fixing it.  Your insurance company probably paid you for it anyway, or at least should have.  Nothing scary here.  If you owned the vehicle, and were looking to trade it in or sell it, those things would effect the value anyway, so this is not a cost exclusive to a lease.  It’s just more visible because it becomes a bill, rather than a deduction from value.

Next time we will start to look at the question “is leasing right for me” and the implications and ramifications it may have for typical customer situations.  Who should lease?  Who shouldn’t lease?  We will also discuss the lease end options I alluded to earlier.

Mike Bidwell
Mankato Motor Co.

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