Leasing used cars explained

Leasing a used vehicle can be an attractive deal in many ways, no least
getting you into that luxury model or SUV, for lower monthly payments than
a brand new one. Be prepared, however, to do some more homework to dissect
a good deal.

As with new car-leasing, your price research should focus on the key
figures that are the initial market value and the estimated residual value
of the used car. This is harder to predict since there is no factory-set
sticker price on used cars, and the residual percentage is very much pegged
to a subjective current retail value. Use different sources to get a rough
idea of the value of the used car: your local dealerships, internet
car-evaluating tools, such as Edmunds.com and Cars.com, to name but a few.
Another way to pin down a good estimate is to compare the lease on your
given car to a lease on a new-car with the same make and model. This should
give you a better picture of the difference between leasing new and going
for used. Just like leasing a new car, used vehicle leasing is more
attractive when residual values depreciate the least. You stand a better
chance of finding a bargain in the high-end, luxury vehicles that keep
their values better as used cars.

Next, you need to check the initial mileage and the overall vehicle
condition. The maximum mileage on a used car should be no more than 12,000
miles a year. A 3-years old car with 50,000 miles on the clock is very
unlikely to make a good used-vehicle lease. Check for signs of excessive
use, like worn seat fabric, worn pedal pads and dirty engine, which might
indicate that the odometer has been rolled back. If the car is not
certified, you need to get it thoroughly inspected. Ask your dealer for a
manufacturer-sponsored certification program or have your car certified by
a qualified mechanic or inspection service.

Most used-car deals don’t come with gap coverage. This is a special type
of coverage, normally offered on a new auto-lease, to cover the consumer if
the leased vehicle is lost, stolen or damaged. Typically, auto-insurance
policies cover only what your car is worth at the time of loss, not what
you still owe on the lease. The difference could run into thousands of
dollars. For peace of mind, do not enter into any used-car lease without
gap-coverage. Arrange it separately with either the lease dealer or your
auto-insurance company.

Leasing Glossary

In order to get a good leasing deal, you need to understand leasing jargon.
Read through this leasing glossary to get an overview of the basics:

Acquisition fee: A fee charged by a leasing company to begin a lease. Not
all leasing companies charge an acquisition fee but if charge it starts at
about $300 and is seldom negotiable.

Capitalised cost: The total selling price of the leased vehicle This also
accounts for taxes, title, license fees, acquisition fee and any optional
insurance and warranty items you elect to fold into the lease and pay
overtime rather than upfront.

Depreciation fee:
Forms part of the monthly lease payment charge and accounts for the loss
in the value of the car at the end of the lease. The vehicle’s list price
minus the expected residual value at lease end is divided by the number of
months in the lease to give the depreciation fee. Suppose you decide to
lease a vehicle with a retail price of $23,500. The leasing company
estimates that after a three year lease, the vehicle will be worth 35% of
its original retail value, or $8,225. The difference, $15,275, divided by
the number of months in the lease, 36 months, gives us the depreciation fee
($424)

GAP insurance Pays off the lease balanced if the vehicle is wrecked, stolen
or totalled.

Inception fees any fees that are due at the beginning of a lease. These
typically include a security deposit, acquisition fee, first monthly
payment, taxes and title fees.

Mileage allowance The maximum number of miles a leased vehicle can be
driven a year without incurring an excess mileage penalty. A typical
mileage allowance is 12,000 to 15,000 miles a year, although this is
negotiable with your leasing company.

Mileage charges a penalty that you incur if you exceed your mileage
allowance on a leased vehicle. Typical mileage charges are 10 to 20 cents
per excess mile.

Money-factor A fractional number, such as 0.00043, used in calculating your
monthly lease payments. You can get a rough estimate of the annual
percentage rate on your lease by multiplying the money factor by 2,400. If
a dealer quotes a money factor such as 3.4 than you can get the equivalent
APR, 8.16, if you multiply by 2.4.

Residual value Residual value is the amount of money the leasing company
says your leased vehicle will be worth when your lease ends. Higher
residual values lead to lower monthly payments but higher lease-end
purchase cost if you decide to keep the vehicle.

Security deposits an up-front amount that your leasing company required at
the beginning of a lease to safeguard against non-payment. This is
generally refundable at the end of your lease.

Termination or Disposition fee The amount you have to pay the leasing
company at the end of your lease if you decide not to purchase the vehicle.

Wear-and-tear charges Extra charges you have to pay at the end of your
lease for any wear and use the leasing company considers above normal.

Leasing and your credit score.

Your credit score is part of the leasing decision. When you apply for a
lease, your lease company will typically look at your credit score to
decide whether you to approve the application.

The leasing contract stipulates that you make regular, monthly payments
over your lease term. The credit score you lease company requests
identifies how likely you are to make such payments. It is simply a number
calculated according to a model that takes into account your payment
history, any amounts you owe and credit currently in use.

It is very important to keep a good credit-score, usually above 700, to
qualify for a lease or any other lending decision. Start by ordering your
credit report from Fair Isaac Corp, the company that creates your credit
score. If erroneous data is held about you, then contact the creditor
responsible and get such information corrected.
Your payment history is the single most important factor in determining
your credit score, so get in the habit of paying everything you owe on time
and keep the balances low in your credit cards.