What You Need To Know About Car Leasing
A lease lets you drive a new vehicle without paying a large sum or even taking out a loan. Leasing consumers should familiarize themselves with two key financing concepts to 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 of how leasing works. Many people on a lease pay a lot more because 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 or even taking out a loan. Leasing consumers should familiarize themselves with two key financing concepts to 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 car's potential value by the end of the lease and is never up for bargaining.
The steps to leasing a car to avoid being duped and paying excessive amounts.
- Decide: Be prepared in all aspects before a lease. Decide on your price range and length of the lease.
- Look for discounted offers: Dealers offer discounted leases as a marketing technique, mostly on vehicles they want to be offloaded or used. 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.
- Negotiate the selling price: Negotiate the car's price as if you were buying. If you’re offered the manufacturer’s retail sales price, reject the offer. Tell the dealer you don’t expect to pay the full price since you're leasing. Negotiating will ensure the total cost, even after extra add-ons, is lower than buying.
- Avoid dealer mark-ups: The mark-ups are also known as the money factors 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.
- 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 wear and tear, and damage you’ll have to pay for the leased vehicle. If you're careful and maintenance-oriented, a longer lease will favor you.
- 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 that no extra charges have been included.
- Start paying the lease: The larger the initial payment, the lower the monthly tab. As with any bill, you’ll face penalties if you fail to make timely payments. 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 it translates to lower monthly payments, but there’s so much more to it than that. The closest idea to leasing is to say 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 using the vehicle instead of purchasing vehicle.
The use of a car includes its loss in value or depreciation cost, excessive wear and tear, and excessive mileage caused during the lease period.
In traditional financing, the buyer pays an interest rate on the car's purchase price. 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 buyer's payment goes toward using the car plus the finance charge. The overall cost of financing through leasing is always higher than a traditional car loan because the buyer never pays the principal.
For example, if the buying price for a car is $20,000 and the lease is two 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 can return the car to the leasing company after the agreed term period. The buyer can 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 the lease. It seems they’ve made a $5000 loss, but this isn’t true.
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 an interest rate on the 20k used to purchase the car in addition to an acquisition fee and a disposition fee. This adds $500 to $1000 to their profit.
How does a car dealer make Profits?
The most common misconception is that dealers profit 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 make much from a new car as a huge part of the money goes 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 interest the dealer has to pay on the loan.
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 a 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 pays the dealer after selling the car. It ranges between 2 and 3 percent of the sticker or invoice prices. For instance, if a car is $10,000, the holdback is between $200 and $300. This holdback allows dealers to sell at invoice or sticker price because they’ll still make money. To negotiate the price better, consumers should research the holdback percentage of a car online since they vary depending on the brand.
- Dealer Cash is bonus manufacturers offer dealers to move the car off lots. Dealer cash is also paid at the end of a model year when 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 commissions, without a base salary.
This is why they can sometimes be overly aggressive when selling a car. They have to hit certain sales goals to earn substantial pay. This sometimes upsets the negotiation process since the buyer wants a low price, and the dealer wants the highest price possible.
Dealerships vary in compensation structure for their dealers. Some still do traditional commission-based plans for salespeople, while others push to sell as many cars as possible, even if it means little to no profit per vehicle. This means that the more car deals are 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 on the average car sales of that month. This money they make also varies depending on commission structures. These structures are set up in the following ways:
- Most dealerships have a minimum commission amount, the least a dealer can make from selling a car. This amount varies for every dealership ranging between $80 and $200
- Salespeople have a relatively low quota (the number of cars to be sold each month), and those that fall below the quota are hard to keep around
- 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%
- Pack fees differ for new and used cars, which affects the total commission rates.
How does a car dealer make money through a lease?
Knowing and understanding how a car dealer makes money off a lease is important to make the best deal possible when buying a car.
Just because a lease is a common financing method does not mean the car dealer does not make money. 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 grasp 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. To do this, multiply the said factor by 2400. Once you covert this, you realize that the dealer is making 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 the 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 $1000 in extras.
To be safe as a buyer and avoid being duped, there are a few do’s you, as the buyer, should follow.
- Negotiate Purchase Price: A lower purchase price will lower the overall cost of the total lease cost.
- 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 great.
- Lease a car with high resale value
- Lease early in the model year
Are there any benefits to leasing?
There are a few buyer benefits of leasing. They include:
- The buyer gets to enjoy the car during its most trouble-free years
- Since the car is new, it is covered by the manufacturer’s warranty which may include free oil changes and other discounted offers.
- Buyers can drive a higher-priced, better-equipped car that they might not be otherwise able to afford
- 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.
- At the end, you drop off the car at the dealer.
The Cons of Leasing
- The most obvious downside to leasing is it’s more expensive than an equivalent loan because you’re driving a rapidly depreciating asset.
- Lease contracts have a limited number of miles. You pay a penalty for the excess mileage if you exceed the limit.
- Monthly payments can go over forever if you are always losing your cars.
- There is a penalty for excess wear and tear when you turn it in.
- You will be subjected to heavy penalties and termination fees if you need to leave a lease before the agreed term. 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 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 in exchange for money.
With leasing, you do not own the car since you must return it at the end of the contract.
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 a lease restricts 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 lease terms 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 the bottom of what’s allowable by lenders.
If your score is under that, a lease is still allowed if you’re willing to pay extra. Anything above 680 is okay to work with.
Personal loaning with a bad credit score means your application will 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 repay the loan, the financier repossesses the vehicle and sells it to recover their loss.
This means you’re much less likely to be denied an auto loan, even with bad credit.
How to increase chances of getting a 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 them 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 aren’t strict as working directly with lenders.
Is buying a car from a dealer or a private seller better?
If you’re looking to buy a new car, I’m sure you’ve asked yourself, “Do I go to 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 or second-hand car rather than a new brandy one. This guide will be able to guide buyers on what option to pick by providing insight into the benefits and challenges of each.
Benefits of Buying From a Dealership
- For buyers not looking for any specific car, dealerships allow them to browse a larger and more diverse car inventory. This is because dealerships can stock more cars than individual sellers. A larger pool to choose from might guarantee a better deal or better value for money.
- Dealerships offer more financing options because they can offer low down payment cars, which an individual seller cannot offer. This is a great plus for buyers who cannot pay for the car simultaneously. By paying timely throughout the 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
- Buying at larger renowned dealerships is better because there are fewer 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 quickly due to malfunctions.
- Friendly customer service. Since dealerships look for lifelong customers, there are chances that they will have better customer service than individual sellers.
- Buying in a car dealership makes building a relationship with the car dealer easy. This is beneficial in several ways, such as maintenance and repairs and knowing what kind of car you want. 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
- High-pressure sales tactics. Car salespeople are known to be a bit too persuasive when guiding buyers on what car to pick. If you feel uncomfortable, remember you can always walk away. Also, remember to avoid purchasing the first visit to a dealership.
Benefits of Buying From a Private Seller
- 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, reducing the car price greatly.
- Since private sellers often look to offload a car, the cars are sometimes in better shape and condition than dealerships. This, coupled with the lowered price, offers a much more fair deal.
- Private sellers close deals quicker.
- 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 to 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 made. Furniture and appliance sales have far fewer commissioned salesmen than they used to, so there is no direct commission.
The salesperson 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 for extended car warranties. 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 the 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 of 6.2% lower than the country's average price; New York is among the cheapest cities to buy a used car.
The following are some of the best dealerships in New York City.
This company offers certified pre-owned cars, trucks, minivans, pickups, and SUVs from models such as Audi, Volkswagen, Toyota, and many more. The company 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 offers multiple financing options so customers receive personalized attention during their visit. The center is open seven days a week.
Atlantic Auto Sales
Located in Brooklyn, customers can access 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 appointments to visit the showroom.
Atlantic also offers 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 the most knows car brands. Their online services allow buyers to 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 Acura, Audi, BMW, Chevrolet, Ford, Honda, Hyundai, Infiniti, Lincoln, Mercedes-Benz, MINI, and Nissan.
The finance department assists buyers with various credit backgrounds to obtain affordable financing options, and auto repairs and services are also available.
The cars have been inspected, and customers can 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 reduced-price vehicles such as Hyundai and Jeep Cherokee.
Used cars, trucks, SUVs, and minivans on hand include models from 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 and foreign vehicles and offers complete auto detailing.
Clients can also inquire about extended warranty contracts available for certain vehicles sold.
Luxury Motor Club
Luxury Motor Club has sold used cars to Franklin Square residents for almost two decades. As its 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 their relationships with manufacturers' fleet departments.
Various financing options for all credit backgrounds are available through on-site financing specialists.
Leasing is a good choice, especially for expensive cars or luxury cars. It is 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.
Can a car lease improve my credit rating?
If you make your payments on time, the auto lender can help you improve your credit rating. That is why you must 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?
Like a bank loan, certain documents are required before getting a car lease. The first is your social security number, driver’s license, and proof of identity.
You must also bring proof of income and the ability to repay the monthly interest payments. Should you choose to go with a luxury car, you will be asked for at least two years of income tax returns.