Leasing 101

[ruskymx]

It seems that there are a lot of questions about leasing on here and I was contacted by another member that had some questions so I though that this could be helpful to more people so I made this post.


The basics
The residual value is the stated value as you said at the end of the lease if you want to purchase it. Your payments are based on the difference of the selling price and the residual plus interest (expressed as a money factor, Scion's Tier 1+ (720+ score) is .00200, which is about 4.5-5%) and taxes. The "interest" is higher than if you financed it, but you are only paying it for a short term on part of the price of the vehicle.

The advertised payments for leases are always plus tax because it varies by states and even counties. For example, Philadelphia & Pittsburgh counties have a 7% sales tax, whereas the rest of Pennsylvania has a 6% rate. Pennsylvania also has a 3% usage tax on leases, which may vary by state as well.

The minimum down payment required for a lease is your first payment and tags. Anything above that is considered a capitalized cost reduction, which is a fancy phrase for additional down payment. When you leave the dealership, you will have 35 payments left, assuming you did a 36 month lease. After you make your last payment, you have 30 days to decide what you are going to do and it needs to be turned in.

Advantages

Leasing is great if you want to get a lower payment for a shorter term and have options at the end of the 3 years. It's also good for someone that may need a different vehicle in the future and you don't have to get into a 5-6 year finance. It also allows you to get a new car every 3 years and be covered under factory warranty the entire time. Also, with Toyota/Scion giving you two years of free maintenance, you only have a year of maintenance to pay for. Another advantage of a lease is all the options that you have at the end of a lease, which is discussed later.

Disadvantages

The one disadvantage to leasing is that you are limited on the amount of miles that you can drive, but you can build more mileage into the lease to accommodate your driving habits.

You may also have to carry higher limits of coverage through your car insurance than you would if you financed it.

Over the long term, if you lease the car first, then buy it out at the end of the lease, you will pay more for it than if you financed it the first time.


Your options with a lease

Your first option at the end of the lease is to turn the car in to the bank at the end of the lease and walk away from it and start over by leasing another car or buying one. Believe it or not, this doesn't happen often at our dealership. We usually always trade them because we want them for Certified Pre-Owned cars on the lot.

A second option is you can trade it in towards another vehicle. I'll use the FRS residual for this example. Say at the end of three years, the vehicle is appraised at $17,500 and the residual (buy out) is $16,698. The $802 is YOUR money. The way it works is that the dealership trades the car and pays it off and that money is applied to your next deal.

The other scenario would be, say if the car is appraised at $15,000. The negative equity is not your problem, it's the banks. In this situation is when you would just turn the car in and walk away. This scenario usually occurs if someone drives more miles than what was allowed in the lease and the vehicle is worth less because of that. This is when excess wear and tear comes into play, which I will get into later.

Another option with the end of the lease is to buy it out yourself at the end. You can either obtain the financing yourself or you can go into your local dealership and they can do the financing through Toyota or another bank they deal with. You will have to pay sales tax on the residual value because during your lease, you only pay sales tax on each payment, not the entire amount.

Your last option at the end of a lease, at least with Toyota anyway, is to extend it. Toyota Financial Services will allow you to extend your lease as long as your payment history has been good with them. An extension comes in handy in a situation where you may not be in a position to buy or lease a new vehicle for whatever reason, or Toyota or Scion may be releasing a new model that isn't out yet that you want or had to order etc. Now if you want to extend your lease to go buy a new "Brand X" car, then tough luck, they want their car back or you to buy it.


I heard leasing was the worst thing you can do.

Many of the horror stories that you may have heard about leasing is from the mid-90's when they were open-ended. What that means is the banks were "open" to do or charge whatever they wanted at the end of the lease and unfortunately, they took advantage of a lot of consumers. Leases now are closed-ended and that means that everything with the lease contract is agreed upon the signing of the initial contract and nothing changes. There will be no surprises.

Other "bad experiences" with leasing has to do with the customer driving way more mileage than they anticipated, whether it was from a career change or whatever. They then got a hefty excess mileage bill at the end when they turned the car in.

If the car is returned to the bank, here's where excess wear and tear and mileage come into play. Excess mileage charges are $0.15 per mile at the end and $0.10 if you build it in up front. You can build in 33,000 miles per year into a lease, but by doing so, reduces the residual value, which in turn, raises your payment. For every 10,000 miles you add into the total mileage, you should add roughly $30 to the payment and it would be figured into the initial contract. So say you max the mileage out on a lease, you should expect your payment to be roughly $180-$200 higher than a 12-15k per year lease. So you do lose a benefit of leasing by building in a lot of mileage. It is cheaper to build it in to the lease, but keep in mind, if you don't use all the mileage, you do not get a refund. You may recapture some of the value in the vehicle being worth more at the end of the lease because it has lower mileage, but not all of what you paid in.

Another thing you may hear about leases is that you are locked in for the whole term. WRONG! You can trade in or buy out a lease whenever you want. It's usually best to keep a lease at least half to two thirds of the lease term, so on a 36 month lease, 18-24 months.

Here is Toyota's Guidelines for Excess Wear and Use:

Toyota's Definition of Excess Wear & Tear

I hope this helps some of you that were/are considering a lease. If you have any questions, feel free to ask. If you have anything to add, let me know and I will edit this and update it.

Full Disclosure: *I will be leasing my FRS when it comes in.*

I typed the following up in another post and it is very useful info so I am adding it here as well. It's basically the math required on how to calculate a lease manually by hand.

EXAMPLE:

The residual value on a FRS manual trans is $16,698 (12,000 miles per year) and MSRP is $24,930. Your payments are based on the difference, plus tax, tags, interest, etc.

Your monthly depreciation is ($24,930 + $650 acq fee - $16,698) / 36 mos = $246.72 depreciation

The finance charges are based on the cap cost (sale price, less any trade or cap cost reduction which is down payment in excess of first payment and tags). This example, I'm assuming $0 down, just responsible for start ups (1st payment & tags) due at signing.

The math:

$24,930 + $16,698 + $650 acquisition fee = $42,278

$42,278 * .00200 (Tier 1+ money factor for lease) = $84.56 (monthly "Interest")

This amount is the monthly "interest" to borrow the money to lease the car through Toyota Financial Services. It is based on your credit score. Here's a chart of what TFS's money factors are depending on your score.

Zone 1+ Fico 720+ -----0.00200 up to 60 months
Zone 1 Fico 719-690 ----0.00210 up to 60 months
Zone 2 Fico 689-670 ----0.00255 up to 60 months
Zone 3 Fico 669-650 ----0.00345 up to 60 months
Zone 4 Fico 649-630 ----0.00410 up to 60 months
Zone 5 Fico 629-610 ----0.00490 up to 60 months
Zone 6 Fico 609-580 ----0.00550 up to 60 months
Zone 7 Fico 579-520 ----0.00670 up to 60 months

Now, add the monthly depreciation and the monthly "interest" and you will have the base monthly payment before taxes.

$246.72 + $84.56 = $331.28

The taxes will vary by state/counties, etc, but since I'm in Pennsylvania, I'm going to use my home state for the example.

$331.28 * 9% (6% sales tax + 3% usage tax) = $29.82 tax on payment.

Now add all three amounts together. Depreciation + Interest + Tax = Lease payment

$246.72 + $84.56 + $29.82 = $361.10 lease payment

This payment is just with your 1st payment and tags due at signing, which at my dealership in PA would be $361.10 + $217.05 = $578.15.

For each additional $1,000 down payment, you should subtract roughly $30 per month from the payment for a quick estimate. This method will get you close....I'd say +/- $2-3 per month and if that variance is going to stop you from buying this car, then you probably shouldn't be buying it in the fist place...lol

So for the OP that was putting $2500 down, I would estimate that your payments should be around $300 +/-, depending on the tax rate of course.

The guys's comment about FJ leases being high is in part true. They lease like crap, but it's not because of production. It's because the residual is based off of the BASE MSRP of the vehicle, not the total MSRP of it. So the packages and options are not residualized so you are paying for them in each of your lease payments and none of the value of the packages are added to the residual at the end. THAT is the reason why the lease sucks on an FJ. I wanted to lease an Army green FJ last year, but didn't want a $550 lease pmt on one, so I passed.

This should shed even more light into leasing.

Ruskymx

[civicdrivr]

Question -

Lets say I were to lease a vehicle here in Virginia. In 10 months I end up moving to Arizona. I can turn the car in to any Toyota/Scion dealer?

Is there a standard formula for calculating the value of a car when you turn it in? If I were to turn in the car with 22k miles, 14k miles below the lease limit, is there any way to know ahead of time how much is added to the residual?

You mention trading a lease in - can you trade in only for another Toyota product, or would I be able to trade it in to a Subaru dealer, for example? Are there any fees associated with turning a car in early?

[Dr.Science]

I wasn't sure you could lease the FR-S/BRZ. I went and checked out the Abarth recently and they won't lease those because they're such a limited model (at least that's what the salesman told me).

[ruskymx]

Originally Posted by civicdrivr

Question -

Lets say I were to lease a vehicle here in Virginia. In 10 months I end up moving to Arizona. I can turn the car in to any Toyota/Scion dealer?

The car can be turned into any Toyota dealer. If at all possible, they would prefer the originating dealer, but it's not like Ford which REQUIRES it.

Is there a standard formula for calculating the value of a car when you turn it in? If I were to turn in the car with 22k miles, 14k miles below the lease limit, is there any way to know ahead of time how much is added to the residual?

The residual is calculated at the time of purchase depending on the mileage that you want the lease to be. The lowest annual mileage that Toyota allows is 12k/year. The residual value will be on the lease contract at the time of signing. If you have only 22k miles on the car in 3 years, chances are greater that the vehicle would be worth more than what the residual is because the residual is an estimate of the vehicle being worth $16,698 (FRS 6spd manual) with 36,000 miles. In this situation, I would make sure and have the vehicle appraised by maybe 2 different dealers and see what they are willing to buy/trade it for. You are also free to sell it privately as well, which as everyone knows, you will get more than a trade/dealer buying.

You mention trading a lease in - can you trade in only for another Toyota product, or would I be able to trade it in to a Subaru dealer, for example? Are there any fees associated with turning a car in early?

You can trade it in where ever you want to. For example if Subaru decides to force feed the BRZ, you can trade it in there. As far as turning it in early, you can't just drop it off at the dealership and say here's your car back. I don't want it anymore. You are responsible for the remaining payments. I'd have to check on it but I don't see any reason why Toyota or a customer for that matter would do this, but if you make all the payments, you can probably drop it off whenever you want. You would have paid to lease and drive the car and giving it back before you have to would make no sense unless there are some odd circumstances. Toyota would probably be happy though because they would receive all the payments plus have the car back sooner to send to auction and be able to sell for more money because it's not as old as it would be if it was turned in at the end of the lease.

Ruskymx

[civicdrivr]

Thanks for info!

Let me elaborate on that last question:

Are there any fees associated with turning a car in early?

What I meant to say was if you were to trade it in around the 24 month mark, are there any fees, or do you still owe the balance of the lease?

[ruskymx]

Originally Posted by civicdrivr

Thanks for info!

Let me elaborate on that last question:



What I meant to say was if you were to trade it in around the 24 month mark, are there any fees, or do you still owe the balance of the lease?

There are no additional fees and you are correct, you just owe the remaining payments plus the residual. You can't trade it in at 2 years and just make the remaining payments and not payoff the residual. The dealer that trades the car in will contact Toyota and find out what the dealer payoff is and that amount will include all remaining payments and the residual.

Ruskymx

[tripjammer]

Damn thanks for the info bro. Sounds like leasing this car is a good choice, especially if you are waiting for the FR-S\BRZ turbo in 2015.

[ruskymx]

Originally Posted by tripjammer

Damn thanks for the info bro. Sounds like leasing this car is a good choice, especially if you are waiting for the FR-S\BRZ turbo in 2015.

Exactly! Or maybe even a TRD supercharged GT86. *speculation* Rumor has it that if this car is successful they want to bring the GT86 to the US in 2015 under the Toyota name according to two of my managers that were at a meeting in FL a few months ago. */speculation*

Ruskymx

[thill]

As someone who leased before, I don't think I would lease again. Keep in mind that you are essentially paying the manufacturer to rent a car, and on top of that, you are paying interest on that rental and you do not own the asset at the end of your lease. It is important to understand all the fees associated with a lease including:
- Cap Cost (or capital cost which is the price of the vehicle).

- Downpayment amount (you do not want to put much cash in on a lease if at all possible, you are much better off keeping this cash in your pocket. Beware of dealers that want more than $1000 or so down. If they want $2k-4K down you really need to do your math, and you also need to watch for hidden fees here).

- Outside of the cap cost, and residual cost, and moneyfactor make sure you understand all other fees that a dealer may be applying.

- Moneyfactor. This is important. This is where the interest rate that you pay is factored in, and this is where a dealer can get you based on a number of factors. It is not uncommon for dealers to charge you 10-14% interest as they legally do not have to disclose this. Make sure you know what you are paying in interest and know your credit score before you start negotiating. Your credit score directly relates to the moneyfactor. The stronger your credit, the better off you are. If you have poor credit leasing is not a good idea typically.

- Gap insurance. This is also important. Just because you are leasing a car does not mean you are not responsible for it in the case of an accident. You, not the dealer or bank, is responsible for paying off the car in the event of an accident. For instance, if you get in an accident and you still owe $15000 on the car and the insurance company will only payout $12000, you are responsible for the other $3k. Which means you will need gap insurance for your lease which is an additional expense.

The only time I ever recommend family or friends lease if if they are the type of person that will always get a new car every 3 years and can actually afford to lease. If you cannot afford to buy the the car, I would never recommend leasing it. it You are most likely in over your head if the only way you can make a monthly payment on a car is to lease vs buy.

So if you lease, remember to know:
- Cap Cost (including the downpayment and all fees)
- Residual Value
- Moneyfactor
- Gap insurance
- Mileage and overage cost. I have known people that leased cars thinking they would drive 10-12K miles a year only to get a new job and drive more. It happens.

Me? I hated not owning the car at the end of my 4 year lease. I hated that I had to worry about my mileage and wear and tear. I have started following Dave Ramsey as much as possible and now either pay cash for my cars or buy them and pay them off within 3 years leveraging money from my previous car and money I saved by not paying all that interest and payments. It is hard to do... But it will save you tons of money over time and allow you to invest the money you would be paying to a bank back into your own pocket.

[michaelahess]

Don't EVER get GAP insurance from a dealership. Credit Unions are easily the cheapest for this. Last car I bought, dealer wanted $890, my Credit Union was $202.

Also if you plan on refi'ing the loan later on (end of lease right to buy for example) you will need to re-purchase the GAP except in some very rare cases.

[DeeezNuuuts83]

Originally Posted by michaelahess

Don't EVER get GAP insurance from a dealership. Credit Unions are easily the cheapest for this. Last car I bought, dealer wanted $890, my Credit Union was $202.

Some insurance companies have gap coverage available (though it's usually called something else) for a lot less. That might be worth looking into as well.

[ruskymx]

- Downpayment amount (you do not want to put much cash in on a lease if at all possible, you are much better off keeping this cash in your pocket. Beware of dealers that want more than $1000 or so down. If they want $2k-4K down you really need to do your math, and you also need to watch for hidden fees here).

Couldn't agree more. The only thing that more money down does is make your payment lower and doesn't change or affect the residual or anything else.

- Moneyfactor. This is important. This is where the interest rate that you pay is factored in, and this is where a dealer can get you based on a number of factors. It is not uncommon for dealers to charge you 10-14% interest as they legally do not have to disclose this. Make sure you know what you are paying in interest and know your credit score before you start negotiating. Your credit score directly relates to the moneyfactor. The stronger your credit, the better off you are. If you have poor credit leasing is not a good idea typically.

As far as Scion goes, money factors are posted in the showroom and on the dealer's website.

- Gap insurance. This is also important. Just because you are leasing a car does not mean you are not responsible for it in the case of an accident. You, not the dealer or bank, is responsible for paying off the car in the event of an accident. For instance, if you get in an accident and you still owe $15000 on the car and the insurance company will only payout $12000, you are responsible for the other $3k. Which means you will need gap insurance for your lease which is an additional expense.

100% Correct. Toyota doesn't include GAP as part of their lease. Some lease companies do, so make sure and ask about it. Hyundai does, Wells Fargo & NBT used to when they were into leasing.

Not all GAP insurances are the same either. If you get it through your car insurance company, you are still responsible for your deductible. If you get it through Toyota, Toyota pays your deductible. If you get it through your Credit Union, you'll have to ask them. Another important factor to consider when buying GAP insurance is what % of Retail Value they will pay off. This is especially important if you have negative equity and roll it over on to your next vehicle. My dealerships GAP will cover 150% of Retail. Other insurance companies may be 120%, 130%, etc.

Also, just because you are leasing the vehicle doesn't give you the green light to beat the crap out of it and not care. You still have to maintain it and fix any damage. If you financed it or stroked a check, I bet you would get damage fixed and probably take care of it. If you take care of your vehicles, then you shouldn't have anything to worry about other than mileage when it comes to excess wear & tear. Did anyone even click the link to see Toyota's guidelines? They are pretty damn lenient.

If you have a job change or move etc and your driving habits change substantially, then you could get hit with heavy over mileage charges if the original lease was 12k or something low and you now drive 20k plus per year. 8,000 per year over mileage would result in $3,600 in over mileage charges. (8,000 miles per year * 3 years * $0.15 per mile = $3,600)

Is leasing for everyone? Absolutely not! Is it a great way to get a car for some people? Absolutely!

Ruskymx

[thill]

@ruskymx,

As far as Scion goes, money factors are posted in the showroom and on the dealer's website.

That is awesome. I wish all dealers were required by law to do this. I have seen friends and family get fleeced by my a high money factor and had no clue they were paying the equivalent of 14% or so interest on their lease.

Kudos for Scion for doing this. And the moneyfactor you posted is very fair.

[tibo.dlg]

Originally Posted by thill

- Downpayment amount (you do not want to put much cash in on a lease if at all possible, you are much better off keeping this cash in your pocket. Beware of dealers that want more than $1000 or so down. If they want $2k-4K down you really need to do your math, and you also need to watch for hidden fees here).

I would agree with that. My credit is not that bad (669), I am here in US on a 3 years visa, 2 years remaining so a 2 years lease would be perfect for me.

And so I visited 2 toyota scion dealership. We went with one on an approval process and the other one just gave me some estimate but nothing really serious.

The approval of got from Scion of Kirkland (WA) was absolutely hilarious.

They want $8000 down (yes, you read well, that is eight thousand US dollars), and then monthly payments would "only" be $330 per month for the remaining 23 months. total cost? $15920

Since the residual value of the car after 24 months is roughly $18500, capital reduction is (also roughly) $6500. From $6500 of capital reduction to the amazing $15920 they ask me for, the interest rate would be........

106.46% !

Of course I did not even bother and hanged up the phone, but still, it shows how ridiculous things can get and how careful we sometimes need to be (on this case it was pretty obvious though)

Question (for fun) : should I sue them for such a dishonest proposal?