Ultimate Guide to car leasing: Information, Pros, and Cons

A lease lets you drive a new vehicle without paying a large sum for it or even taking out a loan. Leasing consumers should familiarize themselves with two key financing concepts that will help them negotiate the best deal.

Knowing how to lease a car is important since this knowledge gets you the best deal. But timing is important when it comes to leasing is right to lease a car.

Most people do not have an idea on how leasing works. Many people on a lease are paying a lot more because of this since they can’t recognize a bad deal.

How to lease a new car

A lease lets you drive a new vehicle without paying a large sum for it or even taking out a loan. Leasing consumers should familiarize themselves with two key financing concepts that will help them negotiate the best deal.

• Capitalized cost. This is the buying price for the vehicle you want to lease. Always negotiate this cost as if you were buying the car outright.
• Residual Value. This is the likely value of the car by the end of the lease and is never up for bargaining.

There steps to leasing a car to avoid being duped and paying exaggerated amounts.

1. Decide: Be prepared in all aspects before a lease. Decide on your price range and length of lease.
2. Look for discounted offers: Dealers offer discounted leases as a marketing technique, mostly on vehicles they want offload or on used vehicles. Be on the lookout for discounted deals but be aware of costs that have been added in on top of the deal, often hidden in the contract’s deep details.
3. Negotiate the selling price: Negotiate the selling price of the car as if you were buying. If you’re offered the manufacturer’s retail sales price, reject the offer. Tell the dealer that since you’re leasing, you don’t expect to pay the full price. Negotiating will ensure that the total cost even after extra add-ons is lower compared to buying.
4. Avoid dealer mark-ups: The mark-ups are also known as money factor and can be negotiated downward if you have good credit. Ask what the buy rate is, which is the unmarked-up interest rate on the vehicle. The cost is significantly lower, and if you show you’re a serious consumer (by offering to put down money) the dealer will most likely work on the interest rate with you.
5. Consider a long lease: If you’re well strapped with cash, opt for a longer lease. This will cut your monthly lease payments by 10% or more. However, there is a downside. The longer the lease, the more the wear and tear and damage on the leased vehicle which you’ll have to pay for. If you’re careful and maintenance-oriented, a longer lease would be in your favor.
6. Revise the contract before signing: Chances are once you agree to lease, the dealer will try to persuade you into paying for extra add-ons you don’t need such as pricey maintenance packages, interior dash and leather protection and security systems. Focus on reviewing the contract noting the figures you agreed on and no extra charges have been included.
7. Start paying the lease: The larger the initial payment the lower the monthly tab will be. As with any bill, you’ll face penalties if you fail to make payments on time. Also, turning in your leased car early before the term ends will typically result in a penalty unless you are trading in the car for another leased or purchased car.

What is a car lease and how does it work?

The general public understanding is that is translates to lower monthly payments but there’s so much more to it than that. The closest idea to leasing is to say that it’s similar to renting but this is still misleading and inaccurate. A much better description would be that leasing is a type of financing where the buyer pays for the use of the vehicle instead of the purchase of a vehicle.

The use of a car includes its loss in value, or depreciation cost, excessive wear and tear and excessive mileage caused in the period of lease. In traditional financing the buyer pays an interest rate on the purchase price of the car. That’s why to a dealer, a lease is no different than a regular purchase.

Unlike a regular purchase, there is no principal charge to be paid. Instead, the payment a buyer makes is goes toward the use of the car plus the finance charge. The overall cost of financing through leasing is always higher than a traditional car loan because the buyer is never paying principal. For example, if the buying price for a car is $20,000 and the lease is 2 years long, the buyer will pay interest on the $20,000 for the agreed period. A traditional car loan works differently however as a portion of the monthly payments goes toward paying off the principal therefore constantly reducing the amount owed to the bank, thus reducing the finance charge.

The main advantage of leasing is that the buyer is able to return the car back to the leasing company after the agreed term period is over. The buyer is able to avoid the struggle of selling the vehicle since it is left to the company.

For example, assume you lease a car worth $20,000 and the company sells it for $15,000 at the end of a lease. It seems that they’ve made a $5000 loss but this isn’t the case. The ‘loss’ is the cost of use of the car for which you paid off as part of the monthly lease payments. The leasing company now makes money by charging interest rate on the 20k used to purchase the car in addition to acquisition fee and a disposition fee. This adds a $500 to $1000 to their profit.

How does car dealer make Profits?

The most common misconception is that dealers make profits from a direct sale by overcharging a buyer. This is not entirely true as car dealers want to make the buyer happy than reap them off since they need to uphold their reputation. Most profits they make are from extra service fees such as extended warranties. Dealers don’t actually make much from a new car as a huge part of the money goes straight to the manufacturer. Their cut is usually under 8.7% of the vehicle’s invoice price. This is because the longer a new car sits at the dealership the more the interest the dealer has to pay on the loan.

Car Pricing

Pricing a car is often a complicated process. Consumers assume that the invoice price of a car is actually what the dealer paid for the car. They then wonder how a dealer is making profit if they’re selling the car at this price, and this is where two other sources of manufacturer money come in.

• Dealer Holdback is the money the manufacturer pay the dealer after the car is sold. It ranges between 2 and 3 percent of the sticker price or invoice price. For instance, if a car is $10,000, the holdback is between $200 and $300. This holdback allows a dealer to sell at invoice or sticker price because they’ll still make money. To be able to negotiate the price better, consumers should research on the holdback percentage of a car online since they vary depending on the brand.
• Dealer Cash is a bonus incentive offered by manufacturers to dealers to move the car off lots. Dealer cash is also paid at the end of a model year when both the dealership and the manufacturer want to clear out cars to make way for new incoming models.

How do commissions work in car sales?

Car dealers work on commissions, sometimes straight commission without a base salary. This is why they can be sometimes be overly aggressive when selling a car. They have to hit certain sale goals to earn a substantial pay. This sometimes upsets the negotiation process since buyer wants a low price and the dealer wants the highest price possible.

Dealerships vary in compensation structure for their dealers. Some still do a traditional commission based plans for sales people while others push to sell as many cars as possible even if it means little to no profit at all per vehicle. This means that the more the car deals made, the more money the dealer makes.

Bonuses play a huge role in the overall profit the dealer makes. Bonuses are mainly based on the number of cars sold rather than more profit per vehicle. This is how dealers make money in car sales.

How much does a car salesman make?

The money salesmen make depends on the average car sales of that month. This money they make also varies depending on commission structures. These structures are setup in the following ways:

1. Most dealerships have a minimum commission amount which is the least amount of money a dealer can make from selling a car. This amount varies for every dealership ranging between $80 and $200
2. Salespeople have a relatively low quota (the amount of cars to be sold each month) and those that fall below the quota are hard to keep around
3. Salespeople who exceed their quota have their base commission rate increased more often. The quota ranges between 8 and 11 cars monthly. If the salesperson sells say, 15, their commission rises from 30% to 35%
4. Pack fees () differ for new and used cars which affects the total commission rates

How does car dealer make money through lease?

For you to make the best deal possible when buying a car, it is important to know and understand how a car dealer makes money off a lease. Just because a lease is a regular financing method does not mean that the car dealer does not make money. In fact sometimes, dealers can make more money off a lease than a regular loan purchase. The main reason this occurs is the complicated nature of a lease. Leasing can be a confusing concept for buyers and most of them struggle to get the grasp of it.

Another way dealers make money off a lease is by marking up the interest rate or money factor. Money factors are usually presented as decimals such as .00285 which seem low but isn’t really. A buyer should convert them to an annual rate to see if they’re fair or not. To do this, multiply the said factor by 2400. Once you covert this, you realize that the dealer is making an upward of up to $1500.

Why do car dealers want you to lease?

When leasing, a dealer only has their interest at heart. The dealer is looking for the best possible deal for themselves, deals which will give them high interest rate markups and markups with acquisition fees. They look for deals that offer full Manufacturer Suggested Retail Price of the car so they can have impractical add-ons that add to the price of the car. Think of it this way, on a three year lease, a $20 increase in monthly payment does not seem like a lot but over the lease period it works out to over a $1000 in extras.

To be on the safe side as a buyer and avoid being duped, there are a few do’s you, as the buyer should follow.

1. Negotiate Purchase Price: A lower purchase price will lower the overall cost of the total lease cost.
2. Read the fine print: When shopping for a lease you’ll find ads that seem too good to be true. Reading the fine print reveals catch on these ads, such as the car has a large security deposit or high down payments. When you look at these you realize the deal isn’t that great
3. Lease a car with high resale value
4. Lease early in the model year

Are there any benefits to leasing?

There are a few buyer benefits of leasing. They include:

1. The buyer gets to enjoy the car during its most trouble-free years
2. Since the car is new, it is covered by manufacturer’s warranty which may include free oil changes and other discounted offers.
3. Buyers are able to drive higher priced, better equipped car that they might not be otherwise able to afford
4. Buyers don’t have to worry about fluctuations in the car’s trade-in value or through the hustle of selling it when it’s time to move on.
5. At the end you just drop off the car at the dealer

The Cons of Leasing

1. The most obvious downside to leasing is it’s more expensive than an equivalent loan because you’re driving a rapidly depreciating asset.
2. Lease contracts have a limited number of miles. If you go over the limit, you play a penalty for the excess mileage.
3. Monthly payments can go over forever if you always lasing your cars.
4. There is a penalty for excess wear and tear when you turn it in.
5. If you need to get out of a lease before the agreed term, you will be subjected to heavy penalties and termination fees. Most times, these charges are equal to the amount total lease amount.

How to lease a car with bad credit

When buying a car, especially an expensive car, you can opt to lease to pay for it slowly. This can however be difficult if you have bad credit. Buying a car is an expensive affair. To help with this financial burden, a buyer should opt to lease a car. Leasing however might be a challenge if you have bad credit. To understand how, you need to know how a car lease works.

A lease is a contract where one party conveys the use of something (in this case, a car) to another party for a specified period of time in exchange for money. With leasing, you’re not really owning the car since you must return it at the end of the contract period.

The difference between leasing and buying is that when you buy, the car is now your property while leasing is more of renting from the actual owners. This means that a lease has restriction on how you can use the car.

What credit score do you need to lease a car?

When applying for a car lease, you’re credit score will have to be checked to check the viability of the lease. The worse the credit score, the less favorable the terms of the lease will be. For instance, you may be required to put down a large down payment with a low credit score.

There is no agreed conventional minimum credit score for leasing a car; that always depends on the lender. However, in most cases a score of 620 is near bottom of what’s allowable by lenders. If you’re score is under that a lease is still allowed as long as you’re willing to pay extra for it. Anything above 680 is okay to work with.

Personal loaning with bad credit score means your application is going to be denied. Since the financier won’t have a way to recover their losses, they will not give you a loan in the first place.

It’s a bit different with auto loans. They use the car you’re buying as security. If you don’t pay the loan back, the financier repossesses the vehicle and sells to recover their loss. This means that you’re much less likely to be denied for an auto loan, even if you have bad credit.

How to increase chances of getting car lease with bad credit

Getting a lease with bad credit is not impossible but it is difficult. One of the best things to do is take the time to improve your credit score before leasing a car. If your debts are too high, try paying it down. Saving up enough cash for your security deposit will also improve the chances of leasing a car. You’ll likely be required to put extra cash down when you have poor credit and setting aside extra cash helps.

Another way to improve your chances is to apply for a lease swap. Use a third party service to get paired with someone who wants to get out of their lease. This usually helps avoid paying a security deposit and credit requirements usually aren’t strict as working directly with lender.

Is it better to buy a car from dealer or private seller?

If you’re looking to buy yourself a new car, I’m sure you’ve asked yourself, “Do I go to with a car dealership or a private seller?” It’s a question that bothers a lot of car buyers because both sides have their own have their perks and downsides. Asking this question also means you are looking to buy a used car, or second hand, rather than a new brandy one. This guide will be able to guide buyers on what option to pick by providing insight on the benefits and challenges of each.

Benefits of Buying From a Dealership

1. For buyers not looking for any specific car, dealerships allow them to browse a larger and diverse car inventory. This is because dealerships can stock more cars than an individual seller. A larger pool to choose from might guarantee a better deal or better value for money.
2. Dealerships offer more financing options, in that, they can offer low down payment cars, something that an individual seller is unable to offer. This is a great plus for buyers who are unable to pay for the car all at once. By paying timely over a period of agreed time, the buyer improves their credit score, making it a double plus. Dealerships might also offer discounted rates as part of their marketing plan. Finding such deals
3. It is better to buy at larger renowned dealerships because there are less chances of being conned or reaped off. An established reputation guarantees peace of mind because of name recognition. They also stand behind the car if the buyer returns it within a short period of time due to malfunctions.
4. Friendly customer service. Since dealerships look for lifelong customers, there are chances that they will have better customer service than an individual seller.
5. By buying in a car dealership, it is easy to build a relationship with the car dealer.  This is beneficial in a number of ways such as, maintenance and repairs and knowing what kind of car you are looking for ahead of time.  Most times, dealerships give coupons and savings to their long-term customers. Over time your local car dealership will get to know and understand you and your requirements for your vehicle.

Cons of Buying from a Dealership

1. High pressure sales tactics. Car salespeople are known to be a bit too persuasive when it comes to guiding buyers on what car to pick. If you feel uncomfortable, remember you can always walk away. Also remember to avoid making a purchase on the first visit to a dealership.

Benefits of Buying From a Private Seller

1. Low price. If you’re looking for the lowest price for a used car, the answer is almost always a private seller. There are no dealer fees or documentation fees for private sellers and this reduces the car price greatly
2. Since most times private sellers are looking to offload a car, the cars are sometimes in better shape and condition compared to dealerships. This coupled with the lowered price offers a much more fair deal.
3. Private sellers close deals quicker.
4. Less Hassle. With private sellers, a buyer avoids high pressure selling reps. They also don’t have to worry about filling out paperwork and getting sold on insurance covers that only aim to make more money for the dealer.

What are the commission rates for selling extended warranties?

Although research shows that 55% of owners end up not using their extended warranties, car dealers and salesmen still persuade buyers to purchase a warranty just so they can earn extra money through commissions.

Warranty companies typically pay commissions to the salesmen for each sale, and the retailer pockets a tidy profit with no further responsibility.

There are four major plans one could take when purchasing an extended warranty. They include:

• Major Plan: Deals with major mechanical issues.
• Named Component: Covers bumper to bumper accidents.
• Exclusionary: It covers a lot of parts. Only parts that are not included are listed.
• Luxury: Covers luxury items such as navigation systems and entertainment.

Commission rates heavily depend on the program in which the sales are done. Furniture and appliances sales have far fewer commissioned salesmen than they used to, so there is no direct commission. The sales person may get a spiff if the extended warranty is sold. Commissioned salesmen may get a higher rate or a spiff or may have had a required target for the month.

There may be a large commission to the dealer in the case of extended warranties for cars. But that commission may require a certain amount of included work. There are no fixed commission rates for selling extended warranties. It depends on the agreed rate between the salesperson and the vehicle dealer of manufacturer. However, there is a base commission of 15% for salespeople for any extended warranty they sell. The rates may vary depending on the number of monthly car sales, add-ons and bonuses.

What are the best used car dealerships in New York?

New York is one of the best places to buy a used car in the U.S. With an average listing price that is 6.2% lower than the average price of the country, New York is among the cheapest cities to buy a used car.

The following are some of the best dealerships in New York City.

Alpine Motors

This company offers certified pre-owned cars, trucks, minivans, pickups and SUVs from models such as Audi, Volkswagen, Toyota and many more. The company, located in the Wantagh area also buys cars from individuals. All vehicles are inspected and buyers can also purchase extended service contracts and warranties for many of the cars offered. Alpine also offer multiple financing options so that each customer receives personalized attention during their visit. The center is open seven days a week.

Atlantic Auto Sales

Located in Brooklyn, Customers have access to an inventory of a range of makes and models including from Acura, GMC, Honda, Jaguar, Jeep, Kia, Mercury, MINI, Mitsubishi, Nissan, Saab, Subaru, and Volkswagen. They offer online services such as booking appointment to visit the showroom. Atlantic also offers multiple financing options via its relationships with local banks and lending institutions. Affordable plans are available for those with poor or no credit, and an application is available directly online.

Auto Field Corp

This company is located in Jamaica, Queens. The center sells all types of vehicles under most knows car brands. Their online services allow buyers contact the dealership, leave feedback and schedule a test drive. They also offer multiple financing options.

World’s Best Auto Inc.

World’s Best Auto Inc. has been a used car dealer serving the Brooklyn community for over a decade. Customers have a wide range of makes and models to choose from including from Acura, Audi, BMW, Chevrolet, Ford, Honda, Hyundai, Infiniti, Lincoln, Mercedes-Benz, MINI, and Nissan. The finance department assists buyers with various credit backgrounds obtain affordable financing options, and auto repairs and service are also available.

The cars have been inspected, and customers are able to purchase extended service contracts and warranties for many cars offered. Clients can search for per price range or vehicle type, request a specific vehicle to be found, or come into the showroom to browse inventory.

Sunrise Auto Outlet

Sunrise Auto Outlet is an Amityville used car dealership. Customers can look through the inventory online per make, body type, price, year, model, color, and transmission or check out the reduced price vehicles such as Hyundai and Jeep Cherokee.

Used cars, trucks, SUVs, and minivans on hand include models from the likes of Audi, Chrysler, Dodge, Hyundai, Infiniti, Lexus, Porsche, Toyota, and Volkswagen, and customers will receive assistance with financing from the finance department via various financing options and lending institutions. The car service and auto repair facility can handle domestic as well foreign vehicles and offers complete auto detailing. Clients can inquire about extended warranty contracts available for certain vehicles sold as well.

Luxury Motor Club

Luxury Motor Club has been selling used cars to Franklin Square residents for almost two decades. As their name suggests, the company specializes in high-end vehicles. Their wide range of options includes BMW 3 Series, Porsche Cayenne AWD, Nissan Rogue AWD, Mercedes-Benz S-Class, Jeep Wrangler 4WD, Infiniti G37 Convertible, and Honda Accord.

Luxury Motor Club can also locate whatever car a customer is looking for Because of this their client relationships are long-term. They pass along savings, incentives and rebates to buyers due to its relationships with manufactures’ fleet departments. Various financing options for all credit backgrounds are also available through on-site financing specialists.

Conclusion

Leasing is a good choice especially for expensive cars or luxury cars. It also a good option for people with weak credit scores. Understanding how a lease works goes a long way in ensuring buyers are not duped by notorious car salesmen.

FAQ

Can a car lease improve my credit rating?

If you make your payments on time, then the auto lender can help you build up your credit rating. That is why it is very critical that you review your household needs before getting into any arrangement for a car lease. Do not go getting a car that is beyond your income level.

What documents do I need when applying for a car lease?

Just, like a bank loan there certain documents required before you can get a car lease. The first, is your social security number, driver’s license, and proof of identity. You also need to bring proof of income and ability to repay the monthly interest payments. Should you choose to go with a luxury car, you will be asked for at least 2 years of income tax returns.