A Lexus leasing overview
From time to time I meet car buyers who ask about Lexus leasing. You will find in this article I include a video which is a short example of how I explain leasing to shoppers. You can watch my explanation without the interactions of questions that I would normally get in a lease presentation. Your greatest value in Lexus leasing is that you get to drive more car for less dollars out of your pocket and you get more options down the road.
An alternative form of financing
Think of Lexus leasing as just another way to finance your automobile. Leasing is an alternative form of financing which includes some options not available in traditional loans. As a driver, you are not taking on a full commitment to payoff the entire vehicle price. Also, state sales tax is not collected at time of purchase when you lease. This means you put less money put down to drive off or less money is included in the amount you finance. Your sales tax is added to eachmonthly payment which means lower payments for you.
Also, as a lessee, you agree to a term ranging from 24 to 60 months of driving and making payments. Lease payments are made up of two components. Part of the payment is a percentage of the car being depreciated each month. There is also a small rent for the money use called a money factor. Think of this lease money factor as the annual percentage rate charged in traditional financing. You will usually find lease money factors tend to be much lower than a traditional finance APR.
Your options to purchase
You have the option to purchase your vehicle at a predetermined price at the end of your lease term. Your future buyout value is guaranteed in writing. It is called a residual and can not be changed. Unlike leases of the past, there are no surprises at lease end, the residual is the buyout.
Your future purchase price is determined by miles driven and is calculated as a percentage of the MSRP. Residual value is a set number based on projected wholesale or auction values. Smart manufactures will project a residual value as close to market as past experience allows.
Word of warning
Some manufactures may manipulate their residuals, increasing it to advertise and entice buyers with low payments. This could lead to a server upside position at lease end as described here. Lease payments that are too good to be true compared to other makes and models is a warning flag. These cars tend to be dropped off at lease end. Manufactures will either try to put together a loyalty release program or hit you with high disposition and excessive ear and tear fees.
Good news for lessees
As a lessee, you have the first right to purchase the car you have been driving at a wholesale price. This price could be two to four thousand dollars less than you might find on a used car lot for the same vehicle.
You can also sell the car to another person possibly at a higher price than your buyout. Reselling out of a positive equity lease could provide you with extra cash in your pockets.
If the residual is lower than current market value at lease end, you have the option to drop the car off at the dealership. You can walk away from a lease when the residual value is not in your favor. When the market value exceeds your residual you may consider using the car as a trade in. This is what the car manufactures hope for and they will make incentives available to you to encourage you trading in.
What about the miles?
Not a leasing discussion takes place where the issue of mileage penalties doesn’t come up. The only time a lease finance company will be concerned with your mileage use is when you return your vehicle to the dealership. Remember your buyout or residual is guaranteed on the day you take delivery. Your residual value is based on miles driven over a certain number of months. So if you go over on miles, you have increased the depreciation of the vehicle.
Your cost per mile driven over the agreed miles could range from 20 to 25 cents on average. This is around half the charge by valuation books such as Kelley Blue Book when trading in a high mileage use vehicle. You will be charged for high mileage use whether you pay cash for a car, lease it or retail finance it. You actually come out ahead on mileage cost when you lease because the penalty tends to be the lowest.
If you trade in, keep the vehicle or sell it to someone else, the bank has no concern about miles driven.
So next time you are looking at new car time ask for a comparison of finance vs lease. Remember, leasing allows you to drive more car for less money and you have more options than you would in tradition retail financing.