Minnesota Attorney General's Office
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St. Paul, MN 55101
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The Car Handbook
The good thing about buying a used car is that it has a history. The bad thing about buying a used car is that it has a history.
Experience can be a good teacher. When you buy a used car, it’s possible to know the reputation of the make and model better than you would for a new car, especially a freshly minted model. But you won’t know if the vehicle was treated properly, unless you’re a good gumshoe detective. Learn to be one.
To start your research, take a trip down to the local library where books and magazines provide comparative information or go online and see what information you can find. Every April "Consumer Reports" publishes a detailed report of repair and maintenance frequency for used cars. The publication lists cars by price and provides important safety and fuel efficiency information. But don’t stop there. "Road and Track", "Motor Trend" and "Car and Driver" have automotive reviews, too.
What's a Used Car Worth?
Even those who know next to nothing about cars will tell you to consult the blue book to find out what a used car’s value is. But don’t be thrown when you discover that the blue book is orange. The book’s actual title is the “National Automobile Dealers Association’s ("NADA") Used Car Guide,” and it’s pocket-sized. NADA’s blue book can be found at the library, most bookstores and online at: www.nadaguides.com. Other guides also exist, including “Edmund’s Used Car Prices” (www.edmunds.com) and Kelly's Blue Book (www.kbb.com). Car prices may vary between these books, but many dealers and loan officers go by NADA’s guide, so it’s your best bet. The websites are very user friendly as well. They will ask you questions about the car, and then give you a likely price.
The blue book shows the average trade-in price, average loan price and average retail price for each model car by year. If the car is older than seven years, look it up in the “NADA Older Used Car Guide.”
The guides offer estimates only. Naturally, if the car you’re purchasing was stampeded by elephants escaping the zoo, its value will be lower than what NADA lists. And don’t buy the first car you look at. Comparison shop to get a feel for prices in your market.
Three Ways to Get What You Pay For
When buying a used car, you need to be even more diligent about making sure you’re getting your money’s worth than when you’re buying a new car. New cars are expected to work perfectly. Used cars come with a history of accidents, repairs, rattles, dents and dings.
Following these three important steps will help protect you from being fleeced when buying a used car:
- Check the reputation of the seller,
- Obtain the title information, and
- Have the car inspected by a mechanic and a body expert.
Although you can’t guarantee that you’ll know everything about the car if you take these steps, you’ll have gone a long way toward it.
Check the Reputation of the Seller
Although it isn’t possible to check the reputation of a private individual, you can check out a dealer. You should find out the following:
- How long has the dealership been in business?
- How does the Better Business Bureau rate it?
- Has it been sued by the state Attorney General? If so, why?
All these questions should be answered to help you feel secure that the dealer will honor any contract you sign.
Certified Used Cars
A dealer cannot advertise a used vehicle as "certified" (or some similar word) if the dealer knows or should have known that any of the following apply to that vehicle.
- The odometer does not indicate the actual mileage that the vehicle has driven.
- The vehicle has been repurchased by a manufacturer or dealer pursuant to a warranty or "lemon" law.
- The title to the vehicle has been "branded" with some designation, such as damaged, flood, junk, lemon law buyback, manufacturer repurchase, non-repairable, rebuilt, reconditioned, or salvaged.
- The vehicle has sustained damage in an accident, fire or flood which substantially impairs the use or safety of the vehicle.
- The vehicle has sustained frame damage.
- The dealer fails to provide the buyer prior to sale with completed inspection report indicating all of the components inspected.
- The vehicle is sold as-is or with some other warranty of merchantability disclaimer.
Obtain Title Information
The title is like a résumé of your car’s life, indicating how many miles it may have on it and if it is a prior salvaged vehicle. To get title information, contact the Department of Public Safety Driver and Vehicle Services Division, Motor Vehicle Records, at 651-297-2126 and the TTY number is 651-282-6555. The Department of Public Safety can verify if the car was salvaged and the odometer reading. You can also demand this information from the dealer. When a car is sold to a dealership, that dealership takes control of the title. Nothing prevents the dealership from showing you that title.
- Have a Complete Maintenance and Body Check
Even if the previous owner and dealer seem trustworthy, and say there’s nothing wrong with the car, have the car completely inspected by a qualified auto repair shop. Salespeople aren’t mechanics. You can take the car to a gas station mechanic or to a diagnostic center. A body shop is also a good place to stop to see if the car has had body damage or has been in an accident. If the owner won’t allow you to have the car inspected, take your business elsewhere.
- Obtain a CarFax Report Online
For a modest fee, companies like CarFax (www.carfax.com) will give you specific information about the car you are looking at. Obtaining a detailed report may answer important questions such as: Is there a problem with the odometer reading? Does the car have an accident history? Does the car have a clean title?
- If the car was totaled
By Minnesota law, the title must be stamped “prior salvage” if the car was totaled and then rebuilt anytime after June 1993. If this is the case, you’ll want to check that everything was put on the car when it was rebuilt. A previously totaled car may not be as structurally sound as another car. Have the car checked at a body shop before you decide to buy it.
- Odometer readings
The lower the mileage, the higher the price for the seller. It’s no wonder billions of dollars are bilked from consumers every year by sellers who turn back the miles on odometers.
Because about 90 percent of odometers that are rolled back come from other states, you should research out-of-state vehicles thoroughly. To get a copy of the title, you’ll need to contact the Department of Motor Vehicles in the state where the former owner lives.
Three Ways to Get What You Pay For
Your inspection will not replace a mechanic’s inspection, but you can eliminate obviously poor vehicles with a few tools and a little know-how.
You’ll need to get down and dirty to do this inspection, so wear old clothes and work gloves. If that isn’t your style, find a mechanically-minded friend to go with you. It’s also a good idea to bring a friend to help you check the lights and exhaust when you start the car, to offer opinions on seat comfort and for moral support.
What to Look at
- Look for leaks.
With the engine off, check the pavement under the car. A wet black stain means leaking oil. A reddish stain is transmission fluid or power steering fluid. If the stain is colorless or green, it could be a leak in the cooling system. A colored stain could also mean leaking brake fluid. A clear leak that smells like gas probably is gas and could signify a fuel system leak. Don’t linger over the spill because gas is toxic to breathe and highly flammable.
- Check the radiator.
Never take the cap off a hot radiator. If the radiator is cool to the touch, remove the cap and inspect the water or coolant. If it looks rusty, that could mean corrosion in the cooling system. Next, look for oil in the radiator. It usually appears as a shiny film floating on top of the water or coolant. If you see oil in the radiator, the car probably has an extremely serious problem such as a cracked head or head gasket leak.
- Check the battery.
Look for cracks and leaks. Find out how old the battery is. You can check the cell’s fluid level in older batteries. If the plates in the battery aren’t covered by fluid, the battery hasn’t been properly maintained. This is an indication that the rest of the vehicle may not have been well-maintained, either.
- Check the dipsticks.
Look at the engine oil dipstick. A low oil level could mean the previous owner didn’t maintain the car regularly. Or it could be a sign that the car burns too much oil. If the oil is gummy or dirty, it hasn’t been changed often enough and the engine could be badly worn out.
Next, check the transmission dipstick while the car is idling. A low fluid level may indicate a leaking transmission. New fluid is red. Discolored fluid could indicate a transmission problem, but it doesn’t always mean trouble. If the fluid smells burnt or is discolored, have a mechanic check it out before you buy the car.
- Test the shock absorbers and struts.
Push down on each corner of the car. The car should not bounce more than twice. If it does, the shocks and struts need to be replaced. Remember that they are installed in pairs, so even if only one corner of the car fails the bounce test, you will have to buy at least two new shock absorbers or struts.
- Check the tires.
Make sure the “wear bars” in the tread depressions don’t show through. If they do, the tires must be replaced immediately. If the tires are worn unevenly, particularly if one side of the tread is more bald than the other, the car probably needs an alignment. Be sure to check the spare tire. Often, a seller puts an old tire in the trunk, so even if the mounted tires are new, you can examine the wear patterns on the spare. If you think the car needs to be aligned, consult a mechanic before buying it. The problem could be minor, but it also could indicate the car has been in an accident and will never align properly, or that other important parts such as the tie rods and ball joints need to be replaced.
- Check the tailpipe.
Run your finger around the inside of the tailpipe. Assuming the car does not have a diesel engine, it probably burns too much oil if the residue inside the pipe is greasy or sticky. White or gray powder, however, is nothing to worry about.
- Watch the dashboard lights.
Now you’re ready to turn the ignition key to the first position. Make sure the alternator, oil pressure and “check engine” lights go on. If they don’t, it could mean a bulb needs to be replaced. Or it could mean that the seller has deliberately disconnected the lights to prevent them from signaling mechanical trouble. Start the engine. Now the lights should go out. If they don’t, the car could have a problem with the systems indicated.
- Let the engine idle.
With the car in park, raise the hood and listen to the engine. If you hear a loud noise that sounds like a sewing machine, the car may need a valve job. Step on the accelerator and rev the engine. If you hear a rumbling or hammering sound, the rods or bearings may be bad. Either way, that can spell expensive repairs.
- Look at the exhaust smoke.
With the engine warm and running but still in park, press down on the accelerator and look in the rearview mirror. If the smoke from the exhaust is white, it’s generally a bad sign. It might be only water vapor, but it could be a warning of a cracked engine block, head or head gasket. Likewise, blue smoke can mean the car has bad piston rings or needs an expensive valve job. Black smoke means a too-rich mixture of gas to air, sometimes fixable with a simple adjustment, other times requiring an expensive sensor or computer repair. Under normal weather conditions, the smoke should be clear and colorless when the engine is warm.
- Test the exhaust system.
A rumbling noise from under the car but not under the hood is an indication of a substantial exhaust leak. Have a mechanic check to see if the exhaust system needs work or if the muffler needs replacement.
- Test the brakes.
If the car has power brakes, step down on the brake pedal with the engine running. You should not be able to push the pedal all the way to the floor. It’s a bad sign if there is less than a 1½-inch clearance. Don’t just tap the brakes. Hold your foot in place for a minute or more to be sure the brakes don’t give way or feel mushy.
Test Driving a Used Car
Don’t let the owner take you for a ride! Insist on getting behind the wheel yourself for the test drive. Drive over hills, on city streets and on freeways. Make sure the car doesn’t pull to one side. Brake the car and check to see that the brakes don’t lose pressure when you press hard on them.
If the car has an automatic transmission, see if it shifts smoothly. Drive forward and backward in an empty lot to see if there’s any noise or slippage. And be sure to turn off the radio while driving so you can listen for strange sounds coming from the engine. Finally, if the test drive was scheduled ahead of time and the owner warmed up the engine, be suspicious. A warm engine can conceal many flaws.
If you’ve decided on a car you want, then make a bid. It’s a good idea to review the strategies in Chapter 5 before negotiating the sale.
If the car comes with a warranty, check it over. Read about used car warranties in Chapter 8. Finally, get ready to sign the contract. The car may soon be yours!
Signing the Contract
Before you sign, take out your magnifying glass — or whatever it takes — to help you read the fine print on your purchase contract. Sure, sure, everyone says that. So what specifically should you look for on a used-car contract?
- See if the warranty is noted and that you receive a completed copy of the buyer’s guide.
- Make sure any agreements you made with the seller to repair the car as a condition of the sale are written into the contract.
- Check that it’s in writing that the dealer has completed all federal government safety recall service needed for the car.
- Make sure all blank lines are filled in on the contract.
Remember, there is no three-day cooling-off period for car sales!
The Car Handbook
With all the newspaper and TV ads devoted to auto leasing lately, you’d think leasing was a brand-new concept. It’s not. What’s new is that manufacturers and dealers are promoting leasing more than ever before. And it’s working. In 2010, about 20 percent of the people who drove new cars were leasing instead of buying.
Why is leasing so popular? Is it a fad? Are people simply being influenced by well-produced ads? Or has leasing become as good a deal as buying — or even better? There’s no easy answer. That’s partly because leasing terms and calculations are complicated and partly because comparing buying to leasing is like comparing apples to oranges. Which one is better depends upon individual finances, circumstances and desires. We’ll try to help you sort these out for yourself, so you can judge if leasing makes sense for you.
What Is Leasing and Why Is It So Popular?
Leasing is basically long-term car rental, usually lasting two to four years. You agree to pay a leasing company a fixed amount each month to drive the car, which the leasing company owns, and you also pay for insurance and routine maintenance such as oil changes. You receive a warranty, as you would for a car you’d buy. And, as with a car you own, if you damage a leased vehicle, you and your insurance must cover repairs.
It’s important to note that, unlike buying a car, leasing may mean that you will always have monthly payments. When you buy a car, the car loan is typically paid off long before the car is worn out. In contrast, leasing usually means endless payments. Although you may be able to buy the car at the end of the lease, most people who lease turn in the car at the end of the term and lease another. So the payments continue. In the long run, leasing may be more costly than buying, despite the lower monthly payments.
Then, you may wonder, why is leasing so popular? There are several reasons. With the prices of cars climbing, it has become harder and harder to afford monthly payments that will pay off a car in three years or less. And with new cars costing more than $20,000 today, loans are being stretched over four to six years. By the time you truly own a car, it may not be worth a whole lot in the marketplace. It still may be worth a lot to you, however, if it gets you where you’re going and allows you to drive a car without making payments. That’s something to keep in mind as you learn more about leasing.
Leasing is also popular with people who don’t like driving older vehicles. They can always drive a new car needing relatively little maintenance and fewer repairs than most older cars. If you lease a new car every couple of years, you can always drive a fairly new car. Although you will never escape monthly payments, the payments will be lower than they would be if you were buying a new car every two years. This is the main attraction to leasing a car.
Who Typically Leases?
Leasing is a decision based on personal choice, as well as personal finances. For some people, leasing is a good idea for many reasons. For others, it's like a spin on a race track: It offers a short-term thrill, but doesn't get them anywhere in the long run. See whether or not you resemble one of the following drivers.
The Drive for Success
If you’re like Becky Gilbert, image is extremely important to your success. And if, like Becky, you’re just starting your career, you might not yet be able to afford to buy the car that gives your clients the confidence that you’re a “winner.” By leasing, Becky has decided she can impress her clients by taking them out to lunch in a smooth-handling, mid-sized car with ample passenger room. And she can make the monthly payments required without straining her finances.
The Family That Stays Together
Steve and Julie Smith are in their late 30s and have three young children. They want a car roomy enough to comfortably fit the family, a few friends and various toys, bikes and camping gear for their summer vacations in Minnesota’s scenic parks.
The Smiths are trying to make ends meet on a limited income, yet they want a car that’s safe, preferably with built-in child seats and both driver and passenger air bags. They fear having to pull off the road with a carload of kids, so they also want a car with a low probability for mechanical failure.
Their wants and needs add up to a new minivan that they can’t possibly afford to buy. Recently, they decided to lease a new safety-equipped minivan when the dealer told them about the low monthly lease payments they could make. For once, they didn’t bat an eye at the price.
Living the Good Life
Bob Jacobson has never been one to save. His income is steady, but it doesn’t afford him the lifestyle he wants. He was turned down for a loan to buy the four-wheel-drive truck he wanted. When he found out he could lease the same truck for less each month, he nearly jumped at the chance, but he didn’t feel right about it. By the time the lease was up, he reasoned he’d still have to finance the truck in order to own it. Or, he’d have to keep making payments to lease another truck and possibly come up with another down payment, too.
Bob decided to buy a less expensive car rather than leasing the truck he couldn’t afford to buy. After four years of making loan payments he can afford, he’s guaranteed he’ll own a car and then have a few years of payment-free driving in which to save money for the truck he really wants.
The Pride of Ownership
Jim Merriman made the final payment on his hatchback three years ago. His wife ribs him about driving a “beater,” but in truth the car’s body has held up well. Jim also has tuned up the engine on schedule and replaced a few parts. All in all, the money Jim saves by not having monthly payments makes him gleefully happy every time he sits on the sun-bleached seats.
He’s even started a bank account to put away the money he’d be paying every month if he were leasing. It’s growing so big he plans to use some of his savings to fly his family to Florida in the dead of winter, and he’ll still have a sizable down payment left when he wants to buy a new car.
Beyond Monthly Payments
Even though leasing ads often emphasize low monthly payments, it is critical to look beyond the monthly payment to understand the total cost of a lease. Examine the up-front and back-end fees included in the lease. And, if you don't mind doing a little math, learn how the monthly fee is tabulated to ensure you're getting a good deal. (See "Raise Your Leasing I.Q." in this chapter.) Sometimes the low payments that sounded so good in an ad can conceal hidden costs that add up to a poor deal. Check your lease for these important disclosures:
- The car's price. Make sure the price of the car is listed on the lease. This figure, also called "capitalized cost," is similar to the sale price you would pay if you were buying the car. It is important to know the capitalized cost because it will determine how much you will have to pay each month.
- The trade-in value. If you're trading in a car, make sure the amount you're receiving for the car is shown on the lease. It should be listed separately and subtracted from the car's price (capitalized cost), if you have "positive trade equity."(See "Trade-ins and Outs.")
- Other price reductions. Make sure any manufacturer’s rebate you were promised, any down payment you’re making and any discount you negotiated for the car are listed on the lease and subtracted from the car’s price. Again, if they’re not specifically listed and subtracted, you may not be getting as low a payment as you should.
Examples of Negative and Positive Trade Equity
Owe Money on a Loan?
Do you owe money on a loan for your trade-in vehicle? If so, you may have "negative trade equity." You have negative equity if you owe more on your loan than the dealer is giving you in credit for your trade-in.
$13,000.00 balance owed on loan before trade-in
- 10,000.00 trade-in credit from dealer
$3,000.00 total "negative trade equity"
By trading in your old vehicle, you won't receive a discount on your leased car, but you will reduce the amount you owe on your loan. In this example, the $3,000 in negative equity will be added to the capitalized cost of the car you lease. The dealer will then pay off the outstanding loan on the trade-in.
If you have no payments left to make, or still have a few payments to make on your car but the dealer will pay you more to buy your used vehicle than you owe, you have “positive trade equity.” The dealer should subtract that positive trade equity from the price (capitalized cost) of the vehicle you’re leasing.
$10,000.00 trade-in credit from dealer
- 7,000.00 balance owed on loan before trade-in
$3,000.00 total credit toward your leased car, or "positive trade equity"
With the trade-in, you can pay off your loan and also get a discount toward your lease. Be sure the positive trade equity is shown on your lease contract — and is applied to reduce the capitalized cost.
Consider selling your vehicle yourself rather than trading it in. That way you know exactly what you’re getting for it — and you may get more than a dealer will give you.
Who's Who in Leasing?
Who are the players in the leasing game? While your dealer makes all the arrangements to lease you a car, the dealer is a liaison between you and the leasing company that owns the car. You make your payments to the leasing company, not to the dealer.
- The front end.Remember that the cost of a lease includes more than just the monthly payments. For starters, it includes the up-front payments. One of these, the security deposit, is usually refunded at the end of the lease (unless there is damage to the vehicle). Others, like a down payment, aren’t refunded. You will probably have to pay an acquisition fee of $350 - $650 to take out a lease.
Before you get too excited about monthly payments of $200 on a 24-month lease, for example, check to see whether you will have to make a significant down payment. If the down payment is $2,400, that’s the equivalent of paying another $100 each month you’ll be driving the car.
- The back end. Fees tacked on when you turn in the vehicle at the end of the lease can add a big chunk of money to your leasing bill. Know your driving habits before you lease, so you’ll be able to predict these back-end fees.
Charges that generally add the most to the cost of leasing are extra mileage and excess wear and tear, but there are a few others to watch for, too, such as a termination fee for ending the lease early.
- Extra mileage: You can usually drive a fixed number of miles annually (often 12,000 or 15,000) without incurring extra charges. Any more than that may cost you between eight and 15 cents per mile. If you’re not careful about this item, you can owe a lot at the end of the lease: an extra 2,000 miles a year on a 3-year lease at a charge of 15 cents per mile could cost you $900. You can sometimes get this charge reduced by paying for extra mileage up front, but you won’t get a refund if you don’t drive the added miles.
- Excess wear and tear: Damage you do to the car beyond what’s expected by the leasing company can dent your pocketbook. Many people who lease are frustrated when they get hit with a large bill for “wear and tear” at the end of the lease, especially if they feel the car is in good condition. Read the lease and understand what it says about excess wear and tear. Ask the dealer for a clear and thorough explanation of the standards that will be used to measure “excess” wear and tear, and write those standards into your lease.
- Early Termination Fee: Watch out for the early termination fee, or penalty, if you decide you want to stop leasing the vehicle before the lease term is up. This penalty can be substantial — several thousand dollars in some cases.
- Gap Insurance:Another potential surprise is that under many leases the early termination penalty can be triggered if you “total” your car in an accident. Because the car is no longer drivable, your lease is automatically “terminated,” and you’re obligated to pay off the lease. While your car insurance should cover the cost of damages, it won’t cover the cost of paying off the lease. You’ll need “gap insurance” for that. You can purchase gap insurance when you lease your vehicle.
Finally, be sure you understand the details of the lease. Insist that the dealer walk you through it slowly. Don’t be fast-talked into a deal you don’t fully comprehend. Dealers currently aren’t required to tell you all the elements they use to arrive at the monthly fee, but a customer-friendly dealer will.
If you feel pressured to sign a contract or are unsure of what you’re signing, walk away. A good deal should still be available if you decide to return to the dealership to buy or lease a car. So take your time. Remember, there’s no three-day cooling-off period! Once you sign the lease, you must abide by its terms.
Leasing vs. Buying When Ownership is the Goal
It’s not always easy to figure out if you’d be better off leasing or buying from the start if you ultimately want to own the car. Even so, it’s a good idea to try to determine which makes the best financial sense for you.
To figure out what you’d pay for a car at the end of the lease, ask for the “purchase option price,” or the amount you’d pay to buy your leased car at the end of the lease. Then, add in monthly interest for financing the purchase after the lease is up. While the purchase option price may be negotiable, it’s what dealers plan to charge based on the estimated value of the car at the end of the lease.
Now compare leasing to financing. First, how much of a down payment could you make to lower your monthly payments if you buy the car? When you decide the size of the loan you’d need to buy the car, check loan interest rates offered by your banks or credit union, as well as those offered by your dealer, to make sure you’re comparing leasing with the best financing deal you can get.
Buying the Car at the End of the Lease
When the lease period is over, you can usually opt to buy the car. To decide if buying makes good financial sense, revisit the purchase option price discussed above. How does it compare with the price for a similar used car?
Sometimes the purchase option price is actually less than you’d pay to buy a similar car from a used car dealer. If that’s the case, consider yourself lucky.
Trucks, for example, were unexpectedly popular in the early ’90s, and many people leasing them were able to buy them at the end of their leases for a much lower price than the same truck bought from a used car dealer.
If your car holds its value better than was anticipated when you signed the lease, it’s obviously smart to buy the leased vehicle for the purchase option price. If you don’t really want to own the vehicle, but don’t mind a little work, you can sell it immediately and pocket a profit.
On the other hand, if the purchase option price is higher than the market value of the car, buying it is not a sound financial option. If you want to buy the car anyway, you may be able to negotiate with your dealer to lower the price. But if the dealer won’t match the market price, walk away.
Leasing terminology is confusing and intimidating. To add to the confusion, not everyone uses the same terminology. Take the following glossary with you when you shop for a lease so you have the meanings of all the terms right at your fingertips.
- Acquisition fee, or assignment fee: An additional fee charged by the leasing company. This fee usually ranges from $350 to $650 and is often included in the monthly payment. Sometimes, however, you are required to pay the fee up front.
- Adjusted capitalized cost, or net capitalized cost: The “capitalized cost” (car’s price), minus any deductions to reduce the price of the car. Common deductions are the down payment, trade-in credit and manufacturer’s rebate. The adjusted capitalized cost is used to calculate your monthly payment. It is similar to the “amount financed” in a purchase transaction.
- Capitalized cost: Equivalent to the price of the car, including any add-ons, extra warranties, insurance, rustproofing, or other options that you've agreed to pay for.
- Capitalized cost reduction: Anything that reduces the capitalized cost before the monthly payment is calculated. It usually includes your cash down payment, trade-in credit and manufacturer’s rebate.
- Depreciation: The value that a car is projected to lose over the period of time you drive it. It’s the difference between the adjusted capitalized cost and the residual value.
- Disposition fee: A charge by the leasing company to take the car back and fix it up for sale after the lease is up. Not all leasing companies charge this..
- Downpayment: An amount you pay up front to lower your monthly payment. It should be subtracted from the car’s capitalized cost, or price, before the monthly payment is calculated. It lowers the monthly payment.
- Early termination fee: A penalty payment that may be added to the amount you owe if you terminate your lease early. This could amount to several thousand dollars.
- Excess mileage: Most leases allow for a maximum number of miles per year. Any miles driven over the limit are usually billed at between eight and 15 cents a mile.
- Excess wear and tear: Damage done to the car beyond the expected wear and tear from driving. Excess wear and tear is usually determined by the leasing company.
- Gap insurance: If your leased car is stolen or totaled, your insurance will pay for the damage or loss. It won’t help you make payments still owed to the leasing company. Gap insurance makes up the shortfall, or gap, between the value of your car and the amount you still owe on your lease, including a possible penalty for early termination of the lease.
- Gross capitalized cost: This is the capitalized cost for the leased car, plus the amount of any “negative trade equity” that is added to the capitalized cost.
- MSRP: Manufacturer’s Suggested Retail Price, or “sticker price.”
- Money factor: A number that leasing companies use to arrive at the interest charge for your monthly payment. Unfortunately, the number looks nothing like an interest percentage. It will be something like “.00375.” For many leases, the general rule is that 2,400 multiplied by the money factor is the interest rate. Working this equation out, we see that a money factor of .00375 gives us about a 9 percent interest rate. However, not all lease companies use the same conversion factor to convert the money factor to an interest rate.
- Monthly payment: The monthly lease payments made over the term of the lease. Generally, it includes your depreciation, interest and taxes.
- Net trade-in allowance: This is the amount of credit the dealer is giving you for your trade-in, after taking into consideration the loan balance on your trade-in. Depending upon the amount of your loan, you will have either “positive trade equity” or “negative trade equity.” (See “Examples of Negative and Positive Trade Equity” earlier in this chapter.)
- Purchase option price: What you’ll pay for the car if you buy it at the end of the lease. The purchase option price is often tied to the residual value. If it is, then the higher the residual value, the more you’ll pay to buy the car, should you decide to do so, at the end of the lease period.
- Rent charge: In a lease, this is basically the total amount of interest you are paying. It is also known as the “lease charge.”
- Residual value: How much leasing companies have estimated that the car will be worth after your lease is up. The residual value affects the amount of your monthly payment. Dealers have books with charts estimating the residual value, which is usually shown as a percentage of the sticker price (MSRP), and determined when the car is new. The higher the residual value, the less you will pay each month to lease your car. (See also depreciation.)
- Security deposit: Usually the same amount as one month’s payment paid up front. You’ll get it back if the car is in good condition at the end of the lease.
What the Leasing Company Must Tell You
Federal regulations require leasing companies to disclose certain information to consumers about the terms and costs of their lease. The information that must be disclosed includes:
- The amount of any up-front payments (down payment, security deposit and first month’s payment).
- The number, amount and due dates of your monthly payments.
- The total amount of your monthly payments over the course of the entire lease.
- The cost of the license, registration and taxes..
- The gross capitalized cost (see definition) for the leased car.
- The net trade-in allowance you are receiving for the car you trade in.
- Any capitalized cost reduction.
- The adjusted capitalized cost.
- Rebates and non-cash credits.
- The residual value.
- A description of the insurance provided or required under the lease.
- The warranty terms.
- Who is required to take care of the car and pay for maintenance.
- The standards for determining wear and tear (if the leasing company sets such standards).
- Penalties for default or late payments.
- Whether or not you can buy the car at the end of the lease, and at what price (purchase option price).
One lease term that dealers are not required to disclose is the money factor. However, if you decide that you want to do your own lease calculations or check the dealer's calculations, you will need to know the money factor applied by the dealer. If you want the information and the dealer will not give it to you, consider taking your business elsewhere.
Raise Your Leasing IQ
The Nitty Gritty of Lease Calculations
Before you sign the contract, go over it with a fine-toothed comb — or better yet — a calculator. Checking the numbers is a little complicated but well worth the trouble. Everyone makes mistakes sometimes, and you’ll pay, literally, for any wrong calculations used to figure your lease.
See the “Leasing Glossary” in this chapter for help in understanding the terms used in the following section. In this section, first you’ll learn how to calculate a monthly payment, then you can fill in your own calculations. You’ll also want to review the lease to make sure you understand the up-front and back-end fees, as well as any other terms that you agree to when you sign the lease.
Check Your Monthly Fee
The following formula will allow you to calculate your monthly payment within a few dollars of the actual payment. All you need is a pen, paper and probably a standard calculator, unless you like to do your math by hand. Warning: These calculations will work for most leases. However, some lease companies may use a different type of money factor and a different formula for calculating the monthly payment.
|_________________________________||Example:||Your Lease Payment:
(fill in your numbers)
|Determine the following numbers:|
|MSRP (sticker price)||$22,000||____________________|
|Net trade-in allowance||$2,000||____________________|
|Adjusted capitalized cost||$18,000||____________________|
|Term of lease||36 months||____________________|
In this example, the sticker price (MSRP) was $22,000, but the customer was able to negotiate a lower leasing price (“capitalized cost”) of $20,000. In addition, the trade-in credit reduced the capitalized cost by another $2,000 to $18,000. (Make sure that your trade-in credit and any other discounts are included in the calculations arriving at the adjusted capitalized cost.)
The monthly lease payment is made up of two parts: the depreciation charge and the monthly interest, or lease charge. It is calculated as follows:
Monthly depreciation + interest charge + tax = Monthly payment
(If you want to know approximately what the interest rate on your lease is, in most cases you can multiply the “money factor” by 2400. This conversion works for most money factors, although some lease companies may use a different conversion factor.)
The total depreciation charge is calculated by subtracting the dollar amount of the residual value from the adjusted capitalized cost and then dividing by the number of months in the lease. This is a measure of how much the car’s value is going down each month.
(Adjusted cap cost - residual value)/months in lease = Monthly depreciation
($18,000 - $11,800)/36 = $172.22
Monthly Interest Charge
This is what the leasing company charges you for using its money. It is sometimes referred to as the “rent charge” or “lease charge.” The monthly interest charge is calculated by first adding the adjusted capitalized cost and the residual value. Then multiply the result by the money factor
(Adjusted capitalized cost + residual value) x money factor = Monthly interest charge
($18,000 + $11,800) x .00335 = $99.83
Total Monthly Lease Payment
The total monthly lease payment equals the monthly depreciation plus the monthly interest charge plus the monthly tax.
Monthly depreciation + monthly interest charge + monthly tax = Total monthly lease payment
$172.22 + $93.83 + $17.29 = $283.34
There you have it: your monthly payment. The calculation should be within a few dollars of the amount the dealer quoted. If it’s not, insist that the dealer go over all the costs in the monthly payment. Are there any hidden costs? If the dealer can’t explain all the costs to your satisfaction, walk away.
Note: Another way to calculate your monthly payment is to follow the steps on a business calculator with a lease program. If you do this, you will probably need to convert the money factor to an interest rate before you do the calculations. As a reminder, the usual rule of thumb to obtain the interest rate is to multiply the money factor by 2400.
Following is a model leasing form prepared by the Federal Reserve Board. Dealers may use a form very similar to this.
Next Page: Chapter 8: Words about Warranties