Have you ever thought about leasing a car? It does get pretty tempting when you see deals in the paper like this: $189 a month to lease a brand new 2015 Chevy Cruze for 36 months! But, is this really the amount that you will be paying to drive around this Cruze for the next three years? Many would lead you to believe this to be true, but it simply isn’t. So, the next question is, “How much does that car lease really cost?”
If you buy a car with cash, the deal is pretty straight forward. You pay X amount of dollars for this car that you and the dealer are staring at, and you immediately drive it off the lot. Case closed, deal done, plain and simple. With a car loan, things tend to get more complicated. You’ve got the amount down, the interest rate, the monthly payment, and the length of the terms (in other words, at what point you will actually own the vehicle free and clear). It’s complex, but most buyers get through it without too many questions. Surprisingly enough, leases tend to be even more complicated than purchasing a car with a loan. Many think that a lease is just about one monthly payment, but this is entirely false. Let’s dig into the complexity of the car lease.
The Down Payment – For many leases, you’ll have to pay an initial fee before driving the car off the lot. This is often referred to as “money down” or the down payment.
The Residual Value Percentage – For leases, the dealer tells you how much he expects the car to be worth once the lease is complete. This is done with the residual value percentage. If the car is currently worth $20,000 and the dealer figures that the car will be worth $12,000 in three years, then the residual value percentage for that car is 60%.
The Term of the Lease – The length of the lease is often referred to as the ‘term’. Typically, people lease a car with a 36 month term.
The Money Factor – The money factor is the amount that is added to the lease amount for your interest payment. To translate the money factor into a percent interest payment, you will need to multiply it by 2,400. For instance, if the money factor is 0.00125, the interest amount you are paying is 0.00125 x 2,400, or 3.0%.
The Base Monthly Payment – This amount is calculated by taking the current value of the car and subtracting the amount that the car will be worth after the length of the term (using the residual value percentage). If the difference is $8,000, this will then be divided in the number of months in the term. If it is 36 months, your base payment will be $8,000/36, or $222.
Let’s pause for a moment and take a look at an actual car lease offer – the Chevy Cruze that I mentioned early on in this article:
Based on what we discussed so far, do you think that this car can actually be leased for $189 a month? I desperately hope your answer is no. I almost guarantee that the $189 is the base price to lease this car. Here is what will happen when you lease this 2015 Chevy Cruze:
You will walk into the dealership with your $2,139, expecting to walk out with a brand new Cruze and monthly payments of $189 a month. Instead, they will tell you that the interest rate is 2.9%, so your monthly payment will be slightly higher. Something more like $214 a month (I calculated this using the money factor that we discussed above). This still doesn’t sound like that big of a deal to you, so you hand over the down payment and agree to pay the monthly amount. While you will probably drive out of there in your new car, the financial surprises likely won’t stop there.
The Costs of Leasing After the Purchase
When you are wondering what a car lease really costs, you can’t stop calculating when the car leaves the dealership. There are definitely more costs to be had.
Car Insurance – At this moment, I pay $50 a month for my car insurance because my car is cheap and would not be very costly to replace. But, if I went out and leased one of these Chevy Cruzes, the dealership would no doubt require me to carry full coverage on the car. Since the vehicle costs $20,000 or more, my monthly insurance would likely soar to approximately $180 a month!
Incidents – When the lease is over, you are obviously required to take the car back to the dealership and turn in your keys. After you leave the dealership, the car is sent away to be reviewed and if they find dings and scratches on the vehicle, you will be charged the amount that it costs to fix them. There will also be charges if the tires are misshapen, the check engine lights are on, the upholstery is stained, or if there are cracks in the windshield (among many other things of course). This can be a pretty raw deal because you are not even there to defend your position on the vehicle and the supposed damage that is found. The average incident fee can easily run your another $500.
Mileage Overage – With any lease comes a restriction on mileage. Most commonly, a lessee is only allowed to put 12,000 miles on their car each year. If you go over this allotment, you will need to pay an additional $0.10 per mile. If you happen to go over your allotment by 2,000 miles when you return the car, that is an additional $200. Again, this is not an uncommon thing to have happen, and will add on to your lease costs.
Disposition Fee – This is likely in the contract you signed, but you were never aware of it. When you return the car to the dealership there is a set fee that you are expected to pay, which is basically a service fee. The normal amount is $300.
Early Termination Fee – We will not factor this fee in our calculation, but let’s say that you wanted to exit your lease early (or rather, maybe you have to because of job loss or because of medical bills, etc.). What would you have to pay? It is not uncommon that you would need to pay what is left in the agreement. If you have one year left and your payments are $200, then you would owe $2,400 to get out of the lease. It’s a pretty crappy deal, but this is typically how it is written up in the contract.
So What is the Actual Cost Per Month?
Alright, so we finally got there: the actual cost of a lease per month. Is it $189 a month? Ha, far from it. Let’s tally it up.
Down Payment: $2,139
Monthly Payment: $214 a month for 36 months
Increase in Insurance: $130 a month for 36 months
Mileage Overage: $200
Disposition Fee: $300
Total Cost After 36 Months: $15,523
…and the actual cost per month…? Actual Cost Per Month = $431.19
Instead of paying $189 per month like the ad says, you will actually be paying $431 a month more than if you would have just kept driving your old car. That’s a lot of money to spend on a car each month! For me, it is most definitely not worth it. Did you have any idea what that car lease really cost? I didn’t, but I’m glad I know now! I’m pretty sure I’ll be steering clear from those leases in the future thank you very much.
What about you? Would you still consider a car lease even after knowing the real cost?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.