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Auto Leasing Secrets

Are you thinking about getting a new car lease instead of a conventional car loan? Before you do, be sure to learn how leasing works and how a greedy/dishonest dealer can use a lease to rip you off for thousands of dollars. On this page you will find a brief explanation of how leasing works along with the most common overcharges and outright rip-offs that have been found at many car dealers across the country.

NEW! Be sure to read How I Bought A Popular New SUV for $3,611 Below Dealer Invoice.

New car leasing is basically a long-term rental contract with an option to purchase at the end. The monthly payment is based on the purchase price (cap cost), the down payment (cap reduction), the term (length of lease), the finance rate (money factor), and the residual value. Any one of these items can reduce the monthly payment: a lower cap cost, a bigger cap reduction, a longer term, a lower money factor, or a higher residual value.

So if you fail to negotiate a lower purchase price, your lease payments will be higher. (Smart shoppers always negotiate huge discounts off the purchase price, whether they are leasing or buying.) For a more detailed explanation of how lease payments are calculated, see New Car Leasing Part 2.

Deceptive Lease vs. Buy Comparison #1
To trick people into a new car lease, dealers often use deceptive comparisons that are designed to make even bad lease deals look better than conventional purchases. Instead of comparing lease payments to 5-year loan payments (the term that buyers commonly choose), dealers often use the higher payments on 3-year or 4-year loans to make the purchase look a lot more expensive. Don't fall for this trick!

Deceptive Lease vs. Buy Comparison #2
Another trick that's used in deceptive comparisons is the quoting of inflated (fictional, made up) loan payments -- again, to make a purchase look a lot more expensive than a lease. For example, if the real monthly payment on a purchase with a 5-year loan is around $400, the dealer might say, "Your loan payment for a conventional purchase would be over $600, but a lease payment would only be $399 for the same car." To an uninformed shopper, that lease might sound pretty good, but it's a horrible deal! The monthly payment to lease is the same as the payment to buy.
   Inflated lease payments may also be used, with the "extra" money going towards a secret price or APR increase. Since few consumers understand how auto lease payments are calculated, many have agreed to leases with monthly payments that were inflated by $75 to $100 or more. (And that's why you should always figure out your own loan and lease payments.)

The "Down Payment/Cap Reduction" Trick
Down payments (cap reductions) are often required on car leases to make bad deals look good. Don't fall for this! A cap reduction on a lease is nothing but "monthly payments in advance," and the more money down, the greater the chance that a car lease is good for the dealer, but not for the customer. (In a lease, a down payment doesn't affect the residual or build any equity, it just lowers the monthly payment.) For example, an advertised "$299 per month" 30-month lease based on $1800 down is the same as $359 per month with no down payment. Be sure to analyze all leases based on no down payment (no cap reduction), and learn how to figure out your own payments so you're not ripped off!

The "MSRP for Cap Cost" Mistake
Even if they're lucky enough to escape the dishonest sales practices, the typical auto leasing customer fails to negotiate the price and terms, resulting in the loss of thousands of dollars on each lease transaction. For example, an informed buyer might only pay $18,000 for a car with a sticker price of $20,000. However, someone else who leases the same car at the terms offered by the dealer (usually at the sticker price) would end up with monthly payments about $67 higher (on a 30-month lease) than they would be if the auto lease was negotiated down to the $18,000 sales price.
   When shoppers try to negotiate a lower purchase price (cap cost) on a lease, some dealers will say that they have to use the MSRP in all their leases. This is a lie. If they refuse to negotiate on price, find another dealer who will.

The "Ownership & Equity" Lie
No matter what a dealer says, there is NO ownership or equity in a lease unless the purchase option is exercised at the end. (This typically costs about 50-60% of the original purchase price, or about $15,000 to $18,000 on a $30,000 car.) At the end of a lease, there is typically no equity unless the buyer negotiates a huge discount off the purchase option price. Remember this: a lease is just a long-term rental, it is NOT "another way to buy."

Should you lease first, then buy at the end?
No, this is usually a bad idea because a good lease always has an inflated residual, which means that the vehicle will be worth a lot less than the purchase option price. So if you are thinking about buying, do not lease first. And if you are already leasing, you should probably turn the car in at the end of the lease. Buying at the end only makes sense if you can negotiate a huge discount off the purchase option price.

Is leasing cheaper than buying?
In most cases, leasing costs more than buying over time. Why? Because the most expensive part of car ownership is depreciation. Most new cars lose at least 50% of their value in the first three years, then depreciation tapers off. So if you are leasing a new car every three years, you will be paying for that huge depreciation hit over and over again. You will also be paying all the up-front costs of a new car (tax, title, license, registration) and the higher cost of insuring a newer car every three years. Those "new car costs" could easily add up to $3,000 to $4,000 (or more) every three years.
   If you were to buy and keep a car for a least six years, your depreciation costs over time would be lower and you could avoid those "new car costs" for at least three years. You would also have a dependable, paid-off car that you could keep, sell or donate.
   So when is leasing cheaper than buying? When the lease payment is only $200 to $250 per month for 36 months, with no cap reduction (down payment). If the lease payment is higher than that, or there is a cap reduction that is hiding a higher monthly payment, then it's probably cheaper to buy.

Can I get out of a lease early?
Yes, but it's going to be expensive. You will have to pay an early termination penalty plus the difference between the current market value of the car and the amount of depreciation that you have paid on the lease. So if the residual was inflated (and it probably was), you could be "upside-down" by $2,000 to $3,000 or more. For example, if the early termination penalty is $250 and your lease is upside-down by $2,500 you would have to pay $2,750 to get out of the lease early.
   If you think you can just find someone to take over the lease payments to avoid the early termination penalty, that may be a lease violation that triggers a repossession (with a huge ding to your credit). Be sure to read your lease before trying this. If they allow this at all, the leasing company will usually have to approve of the person who is taking over the lease.

Smart leasing practices:
1. Never lease longer than 36 months. You don't want to be paying for repairs on a leased (rental) car, so make sure that the warranty covers the full lease term.
2. To compare leases on the same car at different dealers, add the cap reduction to the total of all monthly payments for each lease. The lease with the lowest grand total is the best deal.
3. Don't fall for the "cap reduction & lower payment trick" where the dealer uses a big cap reduction to fool you into thinking that you're getting a good deal. A cap reduction is nothing more than "monthly payments in advance" -- it is not a refundable deposit.
4. Be sure to get gap insurance. When a vehicle is totaled in an accident, insurance companies only pay for replacement value of the vehicle, which is usually thousands less than you owe on the lease. Gap insurance will cover the difference, so you will get paid enough to cover the balance due on the lease.
5. Remember that everything is negotiable, including the money factor (lease rate) and the purchase price.

Real Leasing Example - Analysis:
At the time of publication, we saw a "Special Offer" of a 36-month lease on a popular new pickup truck. The monthly payment was $249 with a cap reduction (down payment) of $2,750. The monthly payment sounds great, but
that cap reduction is hiding the real monthly payment - $325 with zero down. (Divide the $2,750 cap reduction by 36 months and you get $76, which is the hidden monthly payment.)
   That dealer knows that $249 per month is an attractive lease payment, but they want people to pay a lot more than that, so they use the "cap reduction trick" to hide the real lease payment, which is $325 with zero down.
   Without that cap reduction, a $249 lease payment would be a good deal. Not a great deal, but a good deal. (A great deal would be $200 per month with zero down.)

Why should you analyze all leases based on zero down (no cap reduction)? Because leasing is a long-term rental, there is no ownership. So the most important thing is how much you will be paying per month to lease (rent) the car or truck. Using a cap reduction just hides the real cost.

NOTE: Be sure to see our Car Buying FAQ page for answers to common questions that people have about buying and leasing.

Money Saving Tips--
To get the best possible deal on a new car or truck, do all of your homework before signing any contracts or putting any money down. Dealer tricks (like secret APR increases, packed payments and other common rip-offs) can quickly erase any discounts or other savings that you think you're getting, so learn how to calculate your own monthly payments. Use the Internet to get at least 5-6 quotes before you start negotiating with dealers. For free (no obligation) quotes on new cars and trucks, use Edmunds,, and CarsDirect. You still need price quotes if you're going to lease, because the price is used to calculate the monthly payment and cap reduction. (A higher price means a more expensive lease.) To make sure you're not missing out on a better deal, get quotes from all three services!

If you're thinking about negotiating your own new car lease with a dealer, be sure to use Expert Lease Pro software. The dealer will be using his software to maximize his profits (at your expense), but you can protect yourself against overcharges by analyzing the deal before you sign any contracts. See their website for more information.
Be sure to see our Money Saving Tips page for more new car buying information and resources.

Is It "Leasing" or "Fleecing"?
Most dealers have been telling prospective car buyers that car leasing is a great idea. Well, they're half right -- it is great for dealers. On average, dealer profit on a new car lease is twice that of a conventional purchase. Even better, customers who lease usually have to return the cars in 2-3 years, giving dealers more chances to make huge profits off the same people. So why is it called "fleecing"? Because, even though some people do end up with good auto lease deals, many have been victimized by outrageous overcharges.

Since most people don't understand how a car lease works, dishonest dealers have been able to take advantage of consumers by using deceptive lease-vs.-buy comparisons; quoting lower prices or interest rates, then using higher ones in the lease; and quoting higher trade-in allowances than people actually receive. Since full disclosure is not yet required by law, few people have known the crucial details of their lease transactions -- and even fewer realize that they have been cheated.

In 1995 ABC's PrimeTime Live did an undercover investigation that found deceptive leasing practices being used at five out of the ten dealers they visited. That same year, a statewide investigation in Florida resulted in 55 Toyota dealers and their distributor setting up a $4.5 million restitution fund to settle complaints of overcharging on car leases. (Other leasing investigations are now under way in 22 states.) On May 14, 2000 KCBS-TV announced the results of its three-month undercover investigation of 14 new-car dealerships in Southern California. Some of the biggest dealers in America were caught red-handed by hidden cameras -- lying, cheating and overcharging customers on new-car leases and purchases.

The Secret Price Increase (The "Flip")
The "flip" is a common trick that's been used to overcharge many people on a new car lease. After a buyer agrees to purchase a vehicle at a negotiated or advertised discount from MSRP, the salesperson convinces them to lease the vehicle instead -- "to lower their monthly payment." Before cap cost (price) disclosure was required, a dishonest salesperson would simply use a non-disclosure lease to secretly raise the price of the vehicle. These price increases were typically $1,500 to $2,000 (some were $5,000 or more), and victims rarely if ever discovered the overcharges.

Now that cap cost disclosure is required by law (nationwide as of 1/98, two years earlier in a few states), secret price increases are more difficult to pull off. However, some salespeople have been so bold (and so greedy) that they have attempted it, anyway -- and succeeded. Most people don't understand how car leasing works, so dishonest salespeople can still get away with price hikes by using one of the following tricks.

First, using a cap cost in a new car lease that's higher than the negotiated (or quoted) price is not even noticed by some people because they don't know what cap cost represents. (It's the "selling price" of a vehicle that's used to calculate lease payments and it's supposed to be the same as the price that was negotiated, quoted, or advertised by the dealer.) Second, if a higher cap cost is noticed, the salesperson might say that that figure has no effect on their monthly payment; they're not buying the vehicle, the leasing company is; and the cap cost is set by the leasing company so it's not negotiable. (Those are all lies.) Third, a higher cap cost is sometimes explained away by saying that it includes finance charges (another lie). Since most people are used to paying thousands of dollars in interest on car loans, this lie sounds believable.

More New Car Leasing Resources
How to avoid common rip-offs, how lease payments are calculated, and how to get great new car lease deals. See Leasing Secrets 2: How to Get Great Lease Deals.

Lower Payments, Higher Finance Charges
Leasing companies love auto leasing because it usually allows them to make a lot more interest on every car they finance. First, since they're not required by law to disclose the effective APR that's being charged, they don't disclose it. Because of this loophole, a lot of leasing companies have charged higher interest rates on auto leases than they have on loans. (They have to disclose those.) Second, since less principal is being paid off in a lease payment, total finance charges on a lease will usually be higher than they would be on a loan -- even when the balance, term and APR are the same for both.

For example, on $20,000 lease and loan balances, at 8% for 3 years (50% residual on the lease), total finance charges on the lease would be $3,608. On the loan, total finance charges would only be $2,572. So you would pay $1,036 more in finance charges on the 3-year lease than you would on the 3-year loan. In fact, the finance charges on this 3-year lease are just a little less than the total finance charges on a 5-year loan (same balance and APR). Worse yet, since lease residuals are often inflated by lenders, and lease charges are based partly on the residual, many car leases will have higher finance charges than our example because it had a conservative residual.

The bottom line: Paying off less principal in a lease lowers the monthly payment, but it also causes higher finance charges. This is why credit card companies encourage people to make only minimum payments -- the lenders get more finance charges that way. And that's one of the dirty little secrets of leasing: It's the automotive version of minimum payments on a credit card.

Money Saving Tip: Don't overpay on a new car or truck! Learn how to get the real dealer cost numbers (plus other car buying and leasing secrets) by reading our New Car Buying Tips page.


[How To Buy A New Car]

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