The ABC’s of Low-Cost Car Leasing for Retired Baby Boomers

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My wife’s old clunker is biting the dust, and we decided to lease a car for her to run around town. We could just become a one-car family, but that would interfere with our independent lifestyles. Our goal is to find a new car with a low-cost lease. So, we have begun looking for a low-cost car lease for someone who only drives 100-200 miles monthly. It has been a journey of learning, my friends.

What Goes into a Lease?

To set expectations, it’s helpful to understand how car leases work. As U.S. News explains:

When you purchase a car, it’s all yours once any auto loan is paid off. Leasing, however, is different. You never have an ownership interest in the vehicle. You just pay for the depreciation that occurs while you have the car, plus interest (called the “money factor” in leasing) and fees. The lease will be broken down into an amount due at signing and a number of equal monthly payments.

You can think of leasing as renting the vehicle for however long the lease contract is. When the contract is up, you simply take the leased car back to the dealership and pay any lease-end, excess mileage, and excessive wear charges. There’s no need to haggle over the value of a trade-in, as you would if you were trading in a car that you own.

As U.S. News further notes, car leasing has an entirely different vocabulary than car buying, and you’ll want to understand some key terms so you can get the best lease terms.

  • The vehicle price that a lease is based on is called its capitalized cost, or cap cost. It’s a negotiated price, and not necessarily the vehicle’s MSRP (sticker price). Any reduction in that amount, such as a down payment, discount, or trade-in, is called a cap cost reduction.
  • A vehicle’s value at the end of a lease is called its residual value. It is set in the lease terms and is non-negotiable. Experts such as ALG determine the residual value by estimating how much a vehicle will depreciate and its worth at the end of the lease period. If you’re not considering purchasing the car at lease end, you want the residual to be as high as possible. A vehicle that has a high rate of depreciation will have a low residual value and will cost more to lease.
  • The amount you are responsible for is the difference between the cap cost and the residual value, plus fees and taxes. In general, you want the lowest capitalized cost that you can negotiate and a vehicle with the highest residual value possible.
  • The interest rate that figures into each month’s payment is called the money factor in leasing. In some cases it can be negotiated, and it may reflect your creditworthiness. If you are comparing different leases, you’ll want to figure the money factor into your decision.
  • Most leases will have a disposition fee that you have to pay at lease end. It covers administrative costs and the cost of refurbishing the vehicle and putting it up for resale. Many leases will require you to make a security deposit at lease signing. If you return the car without excess wear-and-tear or mileage, you can get some or all of the security deposit back.
  • If you decide to end your car lease before the contract is up, you will have to pay an early termination fee. They can be very expensive, and lessees should try to avoid incurring them at all costs.

And there’s a tricky issue called “gap insurance.” This covers the gap between what a car is worth and what you owe at the time of a loss in case the car gets stolen or totaled in an accident. Do you need it? Depends. Check out this article on the subject. Generally speaking, gap insurance is a good thing to buy for peace of mind.

Don’t lease a car for too long. Generally, new cars become with a three-year warranty. If you lease it for five years, consider getting an extended warranty to cover unexpected repairs.

Also, many dealerships will try to sell you a “maintenance package” that offers lower-priced car servicing at their facilities. The cost is factored into the monthly payments. Be advised that you are not required to purchase this.

Plus, let’s not forget the charge per mile over your annual allotment, another way dealers reap more money. Annual allotments used to be 15,000 miles or more. Now, most dealers have reduced that to 10,000-12,000 miles per year. Thereafter, they add $.15-$.30 per mile, due at the end of the lease. If the car is used for just errands around town, this probably won’t hurt. But if you plan on taking road trips, watch out!

Calculate the True Monthly Payment for a Lease

With a down payment or trade-in, you may arrange a lease with low monthly payments. However, the true monthly rate is much higher. For example, if a two-year lease requires $2400 down and has a monthly payment of $140, your true monthly lease cost is $240.

Excluding luxury cars, most leases appear to fall into the $150-$300 monthly range after a down payment or trade-in.

Where to Look for a Low-Cost Lease

There are lots of lease packages out there, but how does one find a low-cost lease? Most articles on this subject agree that watching for dealer specials rather than manufacturer deals is the best strategy. Dealers have inventory they have to move, often quickly. They periodically offer attractive terms that might fit your needs. Just scrutinize the terms!

Can You Get a Car Lease with $0 Down?

With excellent credit, yes. A general rule of thumb is that lease like this will have a monthly payment of one percent of the MSRP. So, if a new car has a list price of $24,000, the best monthly lease cost you could probably expect is $240. A trade-in or down payment could reduce that monthly figure by a $100 or so.

Suggested Reading

How to Find a Car Lease with a Low Monthly Payment

A Google search reveals that the cheapest car leases in November, 2018 are (obviously) for compact vehicles:

  • 2018 Chevrolet Cruze: $159 per month for 24 months.
  • 2018 Toyota RAV4: $179 per month for 36 months.
  • 2018 Kia Forte: $139 per month for 24 months.
  • 2018 Honda Civic: $169 per month for 36 months.
  • 2018 Volkswagen Tiguan: $199 per month for 36 months.
  • 2018 Nissan Rogue Sport: $149 per month for 36 months.

Most require a down payment of $2,000-$3,000, so be sure to compute the true monthly cost if this is important to you. Here are some websites to assist in finding a car lease with low monthly payments:

Be advised that all these sites require you to provide contact information and expect to receive calls and emails from local car dealers.

The Bottom Line for Baby Boomers

It is very hard, if not impossible in the U.S., to find a car lease with monthly payments under $100 UNLESS you are also prepared to submit a large upfront down payment. However, there are good deals in the $100-$200 monthly range with down payments (or trade-ins) of $2,000 to $3,000.

If you are okay with driving a used car, more attractive lease bargains are available. Also, look at buying a depreciated used car rather than leasing a new one – the math might be better!

Our advice: Understand how car leases work before you go shopping!  Set your expectations and stay abreast of local dealers who periodically advertise some good deals. Attempt to keep your true monthly lease cost as low a possible. Don’t lease a car for longer than three years. Try one of the above websites to get dealers competing for your business. And be careful of those extra mileage charges!

A final consideration is to realize that just having a car is expensive. On top of down payments and lease payments, expect monthly insurance costs to run at least $100. And then there’s maintenance, gas, annual fees, etc. It adds up. Ask yourself, “Do I really need a car?” If you can get by with Dial-a-Ride, the bus, a taxi or Uber, maybe leasing a car is not the best decision.

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