There’s a right way — and a wrong way — to lease a car
It’s easy to make mistakes when leasing a car if you don’t know how payments are calculated. You could easily pay much more than someone who is a bit more informed about how leases work.
Let’s look at an example
Say you are in love with the new Hyundai Sonata and it’s the only car for you. However, you have looked on the Hyundai company web site and found that loan payments for a 36 month loan, even with $2000 down, will be about $783 a month. By stretching the loan term out to 5 years, the payments are still $488 a month.
You would like to stay within $400 a month, and not a penny more, which is what you know you can afford, but it appears that buying with a loan won’t quite get you there.
So you consider leasing because you know you can get lower monthly payments. You also know that you are good leasing candidate because you drive less than 12,000 miles a year, take good care of your vehicles, and have good credit. You know you won’t need to end your lease early, which can be very expensive.
You visit a dealer to get your $400 lease deal
When you visit your local Hyundai dealer, you find exactly the Sonata you want, which has a sticker price of $28,500. You don’t quite know how to figure a lease payment based on the sticker price and other factors, but it doesn’t stop you from telling the sales person that you want to lease the Sonata for $400 a month.
You are what dealers consider a “payment buyer.” Dealers love payment buyers.
The sales person checks with his sales manager, who runs the numbers through his computer, and finds that there is no way they can lease this Sonata for $400 a month. Even with minimal price markup he can’t set up a lease deal for less than $467. At that deal, he makes very little profit and would prefer not to do it.
The sales guy tries the $467 deal with you, but you don’t bite. He can’t and won’t go any lower for that car. It wouldn’t be smart business.
What’s next?
What happens next is called a “down-sell.”
The sales dude, after consulting with his manager again, comes back with an alternative deal: a nice Hyundai Elantra, which he explains is just a slightly smaller version of the Sonata and just as nice with most of the features of the Sonata. You could lease that car, he tells you, for the $400 that you can afford.
You look over the Elantra and decide to go with the deal, even though it is not exactly the car you came to get. The $400 payment is good and the car isn’t that bad. You sign the papers and the deal is done.
What just happened?
The Hyundai Elantra’s MSRP sticker price was $6000 less than the Sonata’s, which means a lower lease payment would make sense. However, the dealer’s offer of $400 a month is based on a price that is higher than MSRP. He could have offered a lower lease payment, if you hadn’t been so insistent on the $400 figure. He implies that this is a great deal, although the deal is only great for him. He will make a huge profit on this deal.
Automotive consumers who understand how leasing works and know how to calculate payments would never go for this terrible deal. Those leasing this same vehicle are paying much less per month, and much less in total costs over the life of the lease.
For more details, read our article, Don’t Be a Payment Buyer.