Archive for the ‘Car Leasing Basics’ Category

Can you Modify a Leased Car?

Tuesday, April 24th, 2012

Some people who are interested in leasing cars often ask whether or not a leased car can be modified. These people may be interested in such modifications as adding spoilers, tinting windows, or even changing the rims. The short answer is that yes, you can modify a leased vehicle, but a couple important things must be taken into consideration before doing so.

Whether or not you can modify a leased vehicle really depends on whether you plan on buying the car at the end of your lease. If you plan on buying the car at the end of your lease, modifying it should not be a problem because you will eventually own the car. However, if you plan on returning the vehicle to the dealership after your lease term is up, you need to return the car in its original factory condition without modifications. Therefore, any modification you make must be removed or reversed without damaging the car. The policies on damage to a leased vehicle may vary from one finance company to another, but you could be charged for any excessive damage to the car. To sum up, if you plan on returning the vehicle upon the end of the lease, either modify the car with caution or avoid modifying the car altogether, but if you plan on buying the car upon the end of the lease, modifying it should not be a problem.

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What to Know When Leasing a Car

Thursday, March 15th, 2012

When shopping for a new car to lease, many people tend to visit car dealerships without much prior preparation or knowledge about car leasing and what it entails. Most people will probably have a fair idea of the make and model vehicle they are interested in leasing, but knowing this piece of information by itself is far from sufficient when it comes to what you should know when leasing a car. In this article, we will provide specific information regarding what to know when leasing a car so that you are well-prepared and well-informed.

1. You should know that you are absolutely sure that you want to lease a car. Keep in mind that once you lease a car, you have signed a legally binding contract that obligates you to make a payment every month until the end of your lease. Of course, there are ways to end your car lease early, but they aren’t always available or easy to do.

2. You should know what car you want. It is important to know what car you are looking for so that you don’t waste your own time or the dealer’s time. Do your research before going to the dealership and come up with the ideal car that you plan on leasing. This significantly reduces the time that you will spend at the dealership.

3. You should know your credit score and be familiar with your credit history. Your credit score will essentially determine how good of a lease deal you can get. People with tier 1 credit can get the best deals available because they have exceptionally high credit scores. If your credit hasn’t been established, which is common for younger people whose access to credit is more limited, you may not qualify to lease a car and you should seek a co-signer to help you get approved.

4. You should know the invoice price of the car you plan on leasing. The invoice price of a car is the price the dealer pays the manufacturer to buy the car and place it in the showroom or lot. It is important to know the invoice price because it tells you just how much you can reduce the selling price to bring it as close as possible to the invoice price in order to get the lowest monthly payment. The selling price is the negotiated price of the car that the dealer uses to calculate your monthly lease payment. The lower the selling price, the lower your monthly lease payment.

5. You should know how to calculate your car lease payment. If you understand how a car lease payment is calculated, you stand in a better position to negotiate because you have familiarized yourself with with what can or cannot be changed or adjusted with respect to a lease deal provided by the dealer.

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What is the Residual Value of My Car?

Tuesday, March 13th, 2012

The residual value of your car is determined at the time of the signing of your lease agreement. The dealer uses this residual value to calculate your monthly car lease payment. Therefore, the residual value of a car that you are interested in leasing or that you have already leased becomes identifiable as soon as the dealer has prepared a lease deal with details including the required down payment and the required monthly payment.

If you want to know the exact residual value of your car, several methods are available in order to find out. Here are three different ways to find out the exact residual value of your car:

  1. Check your lease contract/lease agreement which definitely documents the residual value.
  2. Ask the dealer during the time when you are signing your new auto lease agreement.
  3. Call the finance company to whom you are responsible for making your monthly payments every month and ask them to provide you with the residual value of the car you have leased.

Although they may not precisely represent actual residual values, information about residual values can also be found online on websites like Cars.com. Keep in mind that precise residual values may vary from one finance company to another.

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Do Car Leases Appear on Your Credit Report?

Sunday, March 11th, 2012

Yes, car leases do appear on your credit report! They typically appear on your credit report as “installment loans” or “installment accounts.” An installment loan refers to a type of loan that requires you to pay a certain amount of money in a fixed amount of time. A car lease is listed under the installment accounts section of your credit report because it requires you to make a payment every month for a specific number of months.

Depending on the credit bureau (Experian, Equifax, or TransUnion) and the type of credit scoring being used, your credit report could also include details that lists how much is left to be paid or even the total sum that you are obligated to pay by a specified number of months. The term, or total number of months, can also be listed.

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Car Lease Rent Charge

Saturday, March 10th, 2012

The car lease rent charge is one of the several components of a monthly car lease payment. There are three different components that make up a monthly auto lease payment which include the rent charge, the depreciation charge, and sales tax. The rent charge, also known as the finance fee or leasing fee, is the portion of the monthly lease payment that is paid as a “fee” for borrowing a leased car. It is similar to paying interest on a loan.

The rent charge is calculated using a small decimal number that is similar to an interest rate on loans. This small decimal number is known as the money factor and can even be converted into an interest rate by multiplying it by 2400. It works in a way that is similar to interest rates in the sense that higher money factors lead to higher rent charges, while lower money factors lead to lower rent charges.

It is important to realize that money factors often remain unlisted on car lease agreements which means  car lessees often do not know whether the money factor that was used to determine their rent charge was fair or reasonable. Therefore, it is important to always ask the dealer what money factor was used to come up with the monthly lease payment. This money factor should then be converted into an interest rate. Money factors for car leases should be comparable to interest rates available for financed cars.

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What is an Open End Lease?

Monday, February 27th, 2012

There are generally two types of automobile leases available including the open end lease and the closed end lease. In this article, we will discuss the open end lease. The open end lease is a type of car lease that is primarily used for business customers and allows for a bit more flexibility at the end of the lease, which can often times be advantageous or perhaps disadvantageous to the lessee (the individual or business that has leased the vehicle).

The essential distinguishing feature of the open end lease is that the difference between the residual value and the market value of the vehicle at the end of the lease is taken into consideration. Depending on the terms of the lease, the lessor or leasing company could be held responsible for paying you, the lessee, for the difference between the residual value and the market value if the market value is higher. However, the opposite can also be true. That is, if the market value of the car at the end of the lease is lower than the agreed upon residual value, you the lessee can be held responsible for paying for that difference.

Generally, open end leases are rarely the option chosen or provided to most customers that plan to use their cars for everyday, personal needs. To learn more about the differences between open end leases and a closed end leases, visit the link below.

Related Articles:

Closed End Lease vs. Open End Lease

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Video: How to Calculate Your Car Lease Payment

Saturday, January 7th, 2012

In this video, learn the secret formulas that dealers use in order to calculate car lease payments from start to finish. By learning the formulas that dealers use, you will fully understand what a lease payment consists of, which allows you to better negotiate a good deal on any future car leases.

How to Get Out of a Car Lease

Friday, September 9th, 2011

If you are trying to get out of your car lease, you are most likely trying to do so before the maturity date of your lease contract. That is, you are trying to find out how you can get out of your car lease before it ends. Lessees are often interested in getting out of their car lease early for reasons such as financial problems, unemployment, or simply because they no longer wish to drive the car that they are leasing. While getting out of your car lease isn’t always the best or the simplest course of action, it is still quite possible to do so. So what options are available to you and anyone else who is interested in getting out of their car lease early? Let’s take a look.

To get out of your car lease, you basically have five different options available to you.

  1. Payoff your leased vehicle
  2. Sell your leased car/have someone payoff the car
  3. Trade in the car for another car
  4. Voluntary return
  5. Lease assumption

Payoff or Buyout Your Leased Vehicle
The first option is quite straightforward. You simply find out what the payoff or buyout amount is for your leased vehicle and pay it off. This payoff amount is usually written on your monthly car lease statement, but if it isn’t, you can simply call your leasing company/finance company to find out what it is. Once you payoff your car, the title is released to you and you become the sole owner of the car.

Generally speaking, the buyout option is available at any point throughout the term of your car lease, but it isn’t always a wise option to buyout. This is because the payoff amount of your leased car doesn’t fall as fast as the car’s actual market value. This means that if you were to buyout the car for a certain amount at a specific point during the term of the lease, you would probably be paying more than what the car is actually worth. However, if you are approaching the end of your lease term or if you have an in demand vehicle, the payoff amount will be reasonably closer to or sometimes even higher than what the vehicle is actually worth, which would mean that you have “positive equity” on your car.

 

You should definitely closely consider your reasons for wanting to buyout your leased vehicle. Some people consider buying out their leased vehicle because they have excessive mileage and they do not wish to be responsible for excess mileage fees. However, you should look closely at whether paying off the lease or paying the excess mileage fees makes more sense. In most cases, paying the excess mileage fees at the end of your lease will cost less than buying out the car, unless you have frequently been traveling long distances.

Sell Your Leased Car/Have Someone Payoff the Car
If you are interested in selling your leased vehicle, you must first own the car. In other words, the title of the car must be in your name. While you are under a lease contract, the finance company or leasing company owns the title. This means that you must first buyout the car from the finance company before you can sell it.

In most cases, as mentioned above, the actual retail value or private party value of your leased vehicle will be less than the payoff amount. This means that if you were to payoff the vehicle and subsequently sell it to someone else, you would have to come up with the difference between the amount you sold the car for and the amount you paid to payoff the car.

You should always look up the value of your vehicle on sites like kbb.com or edmunds.com to understand what your car is actually worth and whether there is a significant difference between the payoff amount and its actual value. If this difference is rather small or the value of the car is equal to or higher than the payoff amount, selling your car to someone else wouldn’t be such a bad idea.

You can also have a third party payoff the lease directly instead of you paying it off first before selling it. This way, you could avoid having to pay sales tax. This makes the process of getting out of your car lease much quicker, but depending on what is stated in your car leasing contract, this may or may not be allowed. Read the section of your lease contract that deals with early termination to see whether the car leasing company allows a third party to directly payoff your lease.

Trade in the Car for Another Car
When you trade in a vehicle, you turn in your leased vehicle to a dealership who will then offer you a new vehicle to lease or finance. Trading in a leased vehicle in order to lease another vehicle can often be a costly decision. You see, when you decide to trade in your car for another car, the dealer will pay off the car for you. However, if this payoff amount is higher than what the vehicle is worth, they most likely will not accept a trade in because the dealer does not stand to profit off your old car. In other words, if you are what’s called “upside down” on your car, it wouldn’t make sense to trade in your car and the dealer most likely won’t accept the trade in anyway. Even if they do accept the trade in, they will transfer the money they lost (by paying off your vehicle) onto your new car’s monthly payments, which means you’ll end up with higher than average monthly payments.

Voluntary Return
When you voluntarily return your car, what you’re doing is taking it back to the dealership from which you originally leased the car who will then return it to the leasing company. Many leasing companies allow you to return your car at any time throughout the term of your lease, but this doesn’t mean that you can simply turn it in and walk away without any fees or penalties. When you voluntarily return a leased vehicle, there are still some financial obligations you must meet.

Because you are giving the car back, you are not responsible for paying off the car at its payoff amount or its residual value. However, you are responsible for paying for the difference between the payoff amount and the realized value. Now, different leasing companies may have different ways of coming up with the realized value, but it is generally the price that the lessor or leasing company can sell the vehicle for at the time when you turn it in. Of course, there most likely will be a gap between the realized value of the car and its payoff amount, because the lessor will likely sell the car at wholesale auction value.

While a voluntary return is the right way to turn in your car early, you also have the option of an involuntary repossession, which is highly unrecommended. With an involuntary repossession, a lessee simply stops making his/her monthly lease payments, which will eventually lead to a default, giving the leasing company the right to take away his/her car. You should try to avoid an involuntary repossession as much as possible. Not only will you ruin your credit, but the leasing company will most likely pursue you for various costs such as the payoff amount and repossession fees.

Lease Assumption
The last option for getting out of a car lease is to perform what is called a lease assumption or lease transfer. With a lease assumption, an interested buyer takes over your auto lease. Not all leasing companies allow lease takeovers but this option is definitely the most low-cost and efficient option for ending your car lease early, because it allows you to save hundreds, if not thousands of dollars that would otherwise have to be paid if you were to choose a different option.

If you decide to have someone take over your car lease, you should use a reputable company, such as swapalease.com, that assists in the takeover process. You should never try to handle this process by yourself, and you should always involve the leasing company or the lessor in order to successfully transfer the lease and release yourself from any financial or legal obligations to the car. You should make sure, using a written statement from the leasing company, that you are no longer legally or financially responsible for the car after a new lessee takes over your lease.

To conclude, leasing companies aren’t too fond of lessees who decide to get out of their car leases before the maturity date. They would rather lease a car to an individual who can make the payments until the end of the term of the lease. However, you still have multiple options if you decide that you want to get out of your car lease early. Closely consider these options and decide for yourself what option makes the most sense for your situation.

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Closed End Lease vs. Open End Lease

Sunday, September 4th, 2011

There are two different types of car leases. One is called the closed end lease and the other is called the open end lease. A closed end lease is more common for most car leasing customers like you. Your car lease agreement or lease contract should specifically mention whether you have a closed end lease or an open end lease. So let’s go ahead and discuss the differences between and the advantages of each type of lease.

Closed End Lease
A closed end lease is also known as a “true lease”, “walkaway lease”, or “net lease”. A closed end lease is probably the type of lease that is most suitable for people like you and me. Designed mainly for consumers as opposed to businesses, a closed end lease allows you to return the car at the end of the lease with no questions asked. Of course, you may have to pay for excessive wear and tear or damage to the vehicle as well as for having an excessive mileage beyond what was covered according to your lease agreement.

With a closed end lease, the leasing company or finance company sets the residual value of the vehicle based upon the annual mileage limit. For instance, if you were to lease a Honda Accord with an annual mileage limit of 12,000 miles for three years, the car would probably retain about 61 percent of its original MSRP. The leasing company comes up with this residual value based upon how much they predict that the value of the car will depreciate given that the lessee will drive a certain number of miles by the end of the lease.

You also have the option to purchase the car at the original residual value that was set by the leasing company on the day that you leased the car. This is definitely a smart decision if the car is worth more than the residual value. If it is, you could probably sell it for a profit. If you don’t, you can continue to drive the car for as long as you please.

Open End Lease
So what is an open end lease? With an open end lease, a residual value is still determined at the time when the lease agreement is signed. However, you, the lessee, is held financially responsible if the value of the car is less than the agreed upon residual value at the end of the lease. This means that you would have to pay for the difference between the residual value and the value of the car at the end of the lease term if the value of the car ends up being less than the agreed upon residual. On the other hand, if the value of the car at the end of the lease term is worth more than the residual value, the leasing company will pay you the difference between that value and the residual value. As you can probably tell, open end leases can cost more than closed end leases. They are generally used more for commercial business leasing.

What Type of Lease is Better?
If you are a consumer who is interested in leasing a vehicle with a good monthly payment, you should always lease a car with a closed end lease. You will save a great deal of money by avoiding a large sum of money that you would be liable to pay with an open end lease if your car’s value has depreciated more than expected.

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How Does the Down Payment Change the Monthly Car Lease Payment?

Wednesday, August 31st, 2011

To understand how your down payment affects your monthly car lease payment, you first need to familiarize yourself with the different components that make up your down payment. Many people falsely assume that the total sum of money that they pay during the signing of the lease is used towards reducing the monthly car lease payment. This is far from true.

The portion of your down payment that is used toward the reduction of your monthly payment is called the cap reduction or capitalized cost reduction. So when one asks how the down payment changes his/her monthly car lease payment, it is essentially the cap reduction that is causing the change in his/her monthly car lease payment. The higher the cap reduction, the lower your monthly lease payment will be.

If you observe the section of your car lease agreement that provides a break down of the different fees that make up your “total amount due at lease signing,” you will find that the cap reduction is just one of multiple different fees. Some of the other fees include the first month payment, title fees, registration fees, and document preparation fees. I have scanned a sample section of this lease agreement for you to observe. Here, we see that the total due at signing was $1500 and the capitalized cost reduction was a total of $823.61. Again, this means that $823.61 went toward reducing the selling price of the car, which lead to a lower monthly car lease payment.
total amount due at lease signing

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