I decided to write this article since I’m in the middle of shopping for a car and this is fresh in my mind. I have spent majority of my life leasing vehicles and to date, I have leased a total of six vehicles ranging from sedans, trucks and SUVs all with a 36 month term. From mid-range cars such as Toyota, Acura, and Honda to luxury brands such as Cadillac and Mercedes-Benz. So I would like to think I know a thing or two about leasing vehicles. Understanding what the car dealership is charging you may save you a few hundred and even thousands of dollars up front.
I personally enjoy leasing vehicles since I don’t have to deal with the headache of repairs with older vehicles. Obviously, it’s not for everyone, but the way I justify the money spent on leasing vehicles is that same money would have been spent on repairing older vehicles. The key is making sure you take good care of the lease vehicle so you will not be force to buy out or pay for any excessive wear and tear that is not covered by the leasing agreement.
Now onto the subject at hand. The phrase “Zero down payment” is a misconception by consumers and it does not mean you drive off with no initial payment. There are fees to consider which wouldn’t normally be responsible for when purchasing a vehicle.
An example of how car dealers advertise this would be something like this:
I’ll break down the different fees by the different stages of the lease and mark them whether they are negotiable with the car dealers.
Fees Due at Signing
Down payment – Optional
A down payment is optional in many lease agreements. There are things to consider such as if your car is totaled or stolen during the term of the lease you would be at a loss. Most states will charge a sales tax on any down payment. The upside is that any down payment will lower your monthly payment. Keep in mind that the monthly payment is dictated by the cost of the vehicle over the course of your lease and NOT the entire MSRP amount.
Note: The Down payment is NOT the Total Amount Due at Signing. You should be able to gauge how much is due at signing after taking all these fees discussed on this article into consideration.
Security Deposit – Negotiable
Not all leases require a security deposit, and if the lease does, it may be negotiable. Especially if you have good credit or have leased from the same company before. It can cost roughly equal to your monthly leasing payment. This should be returned back to you unless you have excessive wear and tear.
Acquisition or Bank fee – Negotiable
This is the fee charged by the leasing company to setup the lease and often times not explicitly shown on the contract and rolled into the capitalized cost. The Capitalized cost can become part of the monthly payment. In some instances it can be due at the time of signing. This is another profit source for them to charge addition to the finance charge. They range between $495 and $995 depending on the car company and are rarely negotiable.
Note: Some dealers may bump the fee in attempt to profit a few extra bucks. In this case you can negotiate it down if you know what the leasing finance company.
Documentation Fee, Tag, Title, Registration, and License Fees – Negotiable
These are fees you would also pay if you were to finance or purchase the vehicle. You would have to pay the dealer official state and local licensing fees and can range between $50 up to $700. While this is not negotiable, the state can limit how much the dealer can charge for the documentation fees. It may be worth to know what your state will allow.
Dealers often have things such as “prep fees” and “delivery fees” are just add-ons by the dealers and may be negotiable. But be prepared to deal with rejection as some are by the books and say its company policy. I have walked out of a few dealerships and have been called back a few hours later to renegotiate.
Note: Be wary of certain fees that the dealership charges to profit and not required by the state and local governments. The only challenge is that it may not be obvious due to the “official looking titles” given by the dealership. If you are able to determine what they are, they should be negotiable. Otherwise, the official fees are not negotiable.
First Month’s Payment
These are payments due usually at the lease signing. One way to look at this is with a car loan, you usually make payments at the tail end at the end of each month. There may be deals in which the first month’s payment is waived, and this means you’ll get a discount. You should not expect this to be rolled into future payments.
Sales and Car Lease Tax
It will varies depending on the state you live in and WHEN you pay it. In most states, you’re only required to pay taxes on the depreciated portion during the lease and is included in your monthly lease payment. In other cases, you would have to pay taxes on the full amount of the vehicle. New York, and Texas are some states that require the entire sales tax to be paid up front, based on the sum of all the lease payments or full sale price of the vehicles.
Note: It’s best to check with your local DMV to understand what you’re going to dealing with. Last thing you want is to pay more than you think you should. Some states such as Georgia has has a one-time title ad valorem tax (TAVT) and no more annual ad valorem tax.
Dealer Add-Ons Products and Warranty
Once you’ve finalized on the sales number, you find yourself sitting in the Finance Manager’s office and he or she is presenting to you many options that could increase costs. Things such as warranty programs, gap insurance, wear-and-tear coverage and so forth. I personally have rejected ALL of them since I know I can take care of my car and if there are unforeseen rare circumstances (which I’ve encountered before), my own car insurance covers it. Much of what the dealer sells are overpriced and can be purchased cheaper elsewhere.
Fees Due at the End of the Lease
While these are fees that are due at the end of the lease, they are agreed upon during the negotiation and signing phase of the lease. It is important you understand them upfront to manage expectations thereafter.
This is the fee it would cost for the dealer to clean up and resell your vehicle at the end of the lease. The fee is normally between $200 and $500 and could be avoided if leasing another vehicle or purchasing the vehicle at the end of the lease.
Excess Wear Fees
These are fees being charged to the lease to be able to replenish the vehicle so that it’s in the acceptable condition for resale. It’s important to understand what the guidelines are to determine what they will charge you for. In most cases, there should be a certain amount of wear-and-tear during the lease term that will be covered. In my case, I have had up to $1,000 coverage covered by the lease in which I’m not responsible for. Best case scenario is to be able to return the vehicle and not pay anything.
Note: It’s a good idea to clean the car inside and out. Any add-ons you put on the car can be charged as excess wear fees. However, before any customization such as tints or adding a new spoiler, to speak to the dealership and leasing company to save you any headaches when returning the vehicle.>Excess Mileage Fees
Excess Mileage Fees come when the miles you drive goes over the agreed number on the lease agreement. Typically you can have a 10,000, 12,000 and even 15,000 mile lease agreement. Anything exceeding those mileage limit will be subjected to additional fees which are typically between 10 and 50 cents per mile.
Note: It’s best to understand how much you’ll be driving annually. I have had one incident where I had went over 5,000 miles and had pay for the fees. The dealership had offered to trim the fees in half if I decided to get in another leasing contract. Luckily they had a monthly payment program with 0% interest for 12 months.
Getting out of the Lease Options
Things don’t always work out as planned, and you may be looking to get out of your existing lease. These are the likely scenarios and penalties associated with each.
Early Termination Fee
These fees would be applicable for those who decides to end their lease before their term is up. You would be responsible for the unpaid amount remaining on the lease which can be very hefty. It’s best to avoid an early termination or you can be out thousands of dollars.
Lease Swap Fees
The Lease Swapping fees would come to play if you decide to get out of your lease before the end of the lease and can transfer your car payments to another person. The benefit for the new lessee is that they will get a great deal on a short-term lease. There are companies such as LeaseTrader.com, SwapALease.com and eautolease.com who charges fees to assist with this.
Note: Check with your leasing company this is possible. You should shop around and do your homework for the best company to handle this.
Buyout Cost is when you finally decide to purchase the car during the lease. Unfortunately, you’ll be charged a buyout cost. It’s best to wait towards the end of the term as the buyout costs descends over time.
Note: Some people use this as a tactic to make back money if the car has not depreciated to the level of its residual value and resell at a higher market value price.
Vehicle leasing can be confusing and it’s best to do your homework up front before going to the dealership. I have faced this many times and always need a refresher every time my lease is up, especially when the local state rules have changed.
Lastly, because you have negotiated all the numbers upfront, make sure you are carrying it all the way through until you are driving out of the dealer’s parking lot. What I mean by this is that the dealership will try to make up costs somewhere especially if they’ve been talked down on the MSRP or fees and need to make up ground by trying to introduce and/or markup “fees” or sell you unnecessary services.
For example, you may have gotten your MSRP price down to where you want, but realized the money factor and residual has been adjusted from what was discussed earlier. One common thing I hear is that the money factor is dictated by your credit score which means you may not know what money factor they are using to calculate your monthly payment.
Lease Monthly Payment Formula
The basic formula for calculating monthly payment (excluding down payment for simplistic purpose):
Capitalized Cost is how much the car cost after you’ve negotiated. It can also include any trade-in vehicle cost.
Residual Value is how much the car is worth after the lease expires. Sometimes it’s presented in a percentage value.
Money factor is going to affect your interest rates. The formula is Money Factor * 2400 to get your interest rate.
Taxes are different from state to state, whereas, some state may add a 3% lease tax on top of the city sales tax. This adds to the cost.
- (Capitalized Cost – Residual Value) ÷ Term of Lease = Depreciation
- (Capitalized Cost + Residual Value) × Money Factor = Monthly Interest Rate
- (Monthly Depreciation Cost + Interest) × Local Sales Tax Rate = Monthly Tax Fees
Depreciation + Interest + Taxes = Your minimum lease payment
Note: One thing I’d like to mention is that if you plan on trading in a vehicle, make sure the dealer incorporates this to reduce your capital cost. Otherwise, you are likely told that you’ll receive a check in the mail. That’s one way the dealer will end up earning more money off your deal. It can be 3 times the amount you’re expected to pay.
Also, the dealer may also give you the option to extend your lease from 36 to 39 months. This is risky since you’re likely going to be outside the warranty period. You also want to make sure the miles will be enough and prorated.
With that being said, make sure you read everything through and there’s no miscalculation or numbers before you sign on the dotted line.
Hopefully you find this helpful when thinking about your next car lease. Feel free to leave a comment, suggestion or share some of your experience below!
Other helpful links
Get the TruePrice—the Actual Price You Will Pay at the Dealership
How to Calculate Your Monthly Lease Payment
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Anyone who has ever leased a vehicle or even browsed an advertisement for a lease has heard of the term