At Credit Union Leasing of America we pride ourselves in providing thorough, comprehensive education to our lessees. From lease origination to lease end, we are here to provide you all the information you need to make informed, educated decisions.
A lease may be the perfect choice for you. Albeit, automobile leasing is not right for everyone, everyone should look at leasing and make a decision for themselves, because auto leasing is the best choice for many people!
1) Why Lease?
You probably have a good idea of the vehicle that you want to drive, the next step is to decide which type of financing is right for you. Lease or buy?
Admittedly, automobile leasing isn’t right for everyone. But, everyone should explore leasing and decide if it’s right for them before they make a decision to opt for traditional financing. Here’s why!
A) Less initial cash outlay
First, auto leasing requires very little or no cash outlay. Most leases have no security deposit, and the origination fee collected at the time you acquire your lease, called an acquisition fee, is included in the loan amount of the vehicle. Less cash outlay, means more money in your pocket for other things. All you have to do is make your first monthly lease payment at the time you drive away in your new car!
B) Lower monthly payment
As important as your overall cash savings at lease origination, is the savings you will enjoy throughout the life of your leased vehicle. Lease payments are typically 30 to 40% less on a lease than a loan. The average lease payment could be $150 less than a loan payment. With $150 extra dollars a month, you could save in your 401k… tax free! Imagine putting that money toward your mortgage and saving thousands in interest. Pay off a credit card, or save for vacation! Do something more with your money, instead of putting it into a depreciating asset. Lease your car and invest the difference!
C) A vehicle is an expense:
A vehicle is not an investment, it’s an expense. Consider this: would you buy a house that’s worth $300,000 today and is guaranteed to be worth $120,000 in five years? No! Then why buy a car today for $30,000 that will only be worth $12,000 in five years? A vehicle is one of the most rapidly depreciating assets in the market today. Consider leasing it instead and let someone else deal with the depreciation. The basic leasing concept is buy assets that appreciate in value, but lease your vehicle because it depreciates in value.
D) More car for the money:
Because lease payments are lower than loan payments, you can afford to get more car for the money. This allows you to have a new car more often, to upgrade when your needs change, and to take advantage of the newest safety and convenience features.
E) Less sales tax:
On a vehicle purchase you pay sales tax on the entire purchase price of the vehicle.
On a lease, you only pay sales tax on what you use of the vehicle’s value over the term.
F) No depreciation risk:
With automobile leasing there is no depreciation risk. Vehicles depreciate in value, and at the end of your term if you own the car you then have to try and sell it or trade it in. At the end of the lease, it doesn’t matter what its value is because you simply turn the car in and get something new. Once again you are in a position to get a new vehicle with a new factory warranty, instead of driving an old car with service and warranty issues.
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2) Destroying the Myths
You’ve undoubtedly heard a lot of information about automobile leasing and possibly some of it has been negative. But leasing is a great and reasonable option for many consumers. Here are some of the myths related to consumer vehicle leasing:
Myth 1 – High mileage drivers should not lease.
FALSE! High mileage drivers make the most auto-leasing sense! The number one way to depreciate the value of a vehicle is to drive high miles. That vehicle then becomes the most difficult vehicle to resell. Many leases are customizable and can be written for more than 15,000 miles a year. Whether you pay for your miles upfront or at lease end, when you turn in the car you don’t have worry about trading or reselling a high-mileage vehicle.
Myth 2 – Wear and tear and mileage are penalties.
FALSE! Wear and tear and mileage expenses are an equalizer. When you agree to “lease” a vehicle from the lessor (registered owner) the lessor guarantees the residual value of the vehicle, based on your agreeing to drive and maintain the car in a certain manner. If you drive more miles than agreed you use more of the vehicle’s worth, and therefore you will pay for those miles at lease end. If you own the car, you resell it for less and you still absorb the expense of the mileage and excess wear and tear. Whether you lease or own the vehicle, driving high miles or incurring excess wear and tear will affect the vehicle’s value.
Myth 3 – But you don’t own the car.
TRUE… but does that matter? In the lease relationship, the lessor owns the vehicle and you lease (or rent) the use of it. Therefore, at the end of your automobile lease term, the car is returned to the lessor who resells the vehicle. If you own the vehicle at the end of your finance term, you can continue to drive a used, depreciated vehicle or you can sell it yourself. You then own the depreciating asset and its value is worth far less than when you purchased the vehicle. Look at this scenario:
You lease a 2008 Honda Accord, 4 door sedan EX. Your neighbor purchases the same exact vehicle! Here is what your payment scenarios look like:
2008 Honda Accord, 4-Dr Sedan EX
MSRP: $24, 495.00
Sales Price: $24,495.00
Sales Tax Rate: 5%
Interest Rate: 6%
|Amount Paid over Term
||Amount Paid over Term
|Estimated Value of the Vehicle (residual)
||Estimated Value of the Vehicle (residual)
At the end of five years, your neighbor has paid $8699.40 more in payments than you have. He has paid more than $30,000 for a vehicle that is worth less than $10,000. The vehicle is worth 39% of the original sales price, and 31% of what he actually paid for the vehicle (including interest).
You have possibly used the $8,699 for other things over the course of the five years, perhaps you have invested that money and it is earning you interest!
Now, your neighbor owns his car and you will turn yours in and lease something new. Over the next few years, you will be driving a new car with a new warranty and a new payment, and your neighbor will continue to pay for his vehicle in parts and service fees… all the while his vehicle will continue to depreciate in value.
So, it is true that you don’t own the car and at the end of your lease and never will. But do you really want to?
Myth 4 – Automobile leasing is only for the wealthy.
FALSE! Automobile leasing is for anyone who has qualifying credit. You don’t have to be wealthy to understand the value of leasing. Everyone has the same opportunity to minimize monthly expenses and maximize savings and investments.
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3) Choose a Consumer Friendly Auto Lease
Other items to consider when deciding if automobile leasing right for you is the type of auto lease you enter into. Make sure the lease is fully assumable (if at any time you cannot continue to make payments, a qualified lessee can assume the lease on your behalf), that it has no pre-payment penalties, that it is a simple interest amortization (not front-loaded interest), and that you can convert the automobile lease to a loan at any time. There are many consumer friendly leases in the market today, so be sure to choose the right one.
What is the most market-friendly automobile lease? The Credit Union Leasing of America Lease! Not a customer of one of our credit unions or banks? No problem! Call us at 800-878-5400 and we will direct you to a participating financial institution today.
Use our easy Car Lease Calculator to see what the lease payment may be on the car of your dreams!
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4) Leasing Terms
Acquisition Fee – the lessor fee, which is charged to the lessee and is typically included in the gross capitalized cost. This is commonly referred to as the “bank” fee.
Adjusted Capitalized Cost – this is the amount financed after all reductions have been made. This is also referred to as “net cap cost.” This is equivalent to the “loan amount” on a conventional loan.
Base Monthly Payment – is comprised of the monthly lease charge and the monthly principal reduction (it’s like principal and interest).
Cap Cost Reduction – this is the leasing terminology for a down payment. It is a reduction in the cap cost of the vehicle.
Gross Capitalized Cost – (also called “cap cost”) this is a leasing term for the sales price of the vehicle, including dealer-installed equipment plus any fees financed. This is the total amount, before any deductions such as a down payment are applied.
Hard Adds – dealer installed equipment that adds value to the vehicle and also increases the MSRP. Equipment such as a bed liner and alloy wheels are “hard adds”. This equipment is added to the MSRP prior to calculating the residual value. The type of hard adds that can be added to the MSRP before applying the residual value are different per lessor.
Lease Term – the number of months for which the vehicle is leased.
Lessee – an individual who is leasing a vehicle. The lessee leases the vehicle from the lessor, and the loan amount is financed through the lender, or lien holder.
Lessor – the registered owner of the vehicle.
Lien holder – the lender who finances the loan.
Mileage – variations include but are not exclusive to 12,000, or 15,000 miles or more annually. Most leases are customizable, with 15,000 being the standard. If an individual wants to drive more than 15,000 miles pre year, they pay for the additional miles upfront by the residual value being reduced to reflect the additional miles to be driven.
Money Factor – the value used to calculate monthly lease charges. This is similar to an interest rate. It is expressed as a five-digit value, such as .00299. A money factor is not an interest rate, and is simply another form of calculating finance charges which is applicable in the lease industry.
MSRP – Manufacturer’s Suggested Retail Price. This is commonly referred to as the window sticker, or “sticker price.”
Residual Percentage – the percentage used to calculate the residual value of a vehicle. The residual percentage is determined by a variety of variables such as Year, Make, Model and Trim Level of the vehicle, as well as the lease term and annual miles.
Residual Value – the estimated future value of a vehicle. The residual is set by the lessor company, who also guarantees the residual value.
Sales Tax – tax is based on the base monthly lease payment because the lease is a rental agreement. In most states, sales tax is paid monthly, but in some states, sales tax is calculated on the monthly payment, but paid entirely at lease inception. Either way, you pay less in sales tax on a lease than on a loan.
Soft Adds – additional costs that do not increase the MSRP of the vehicle. Mechanical breakdown insurance is an example of a soft add.
Leasing is regulated by the federal government and consumers are protected by the Consumer Leasing Act, also known as Regulation M. For more information on
Regulation M and leasing, visit the Federal Reserve.
Click here to view our brief video on what a lease is and
why you should take a second look at leasing!
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