Leasing a car is typically easier on your wallet than buying.
But lessees are much more likely than buyers to be taken advantage of, for the simple reason that it's difficult to understand what you're paying for.
By law, auto loan contracts must disclose the amount being financed, the interest rate and the size of monthly payments. So it's relatively easy to see if you're being billed correctly.
But leasing companies only have to disclose monthly payments -- not how they are calculated. This formula doesn't appear anywhere on a lease contract.
As a result, most people can't check the math in their contract for simple errors or outright fraud.
This is unfortunate, because so many of the factors that go into the payment formula, such as the selling price of the vehicle and the value of any trade-ins or rebates, are negotiated between the buyer and the dealer. So you're taking the dealer's word that the correct figures were used.
Al Hearn, president of LeaseGuide.com, says a lack of knowledge of how lease payments are calculated is one of the key reasons that consumers overpay.
Simply comparing the monthly payments you negotiated with the figure on a contract doesn't provide enough information, he says.
Monthly Lease Payment Formula
A lease payment is made up of three parts that are added together: a depreciation fee, a finance fee and a sales tax.
This compensates the leasing company for the value your car will lose over the term of the lease. You pay off an equal portion each month. To calculate it, you start with the selling price of the car, plus any fees and taxes, and subtract any rebates or trade-ins you may have. You also subtract the residual value, or what the car is expected to be worth at the end of the lease term. Then divide by the number of months.
Remember, you can negotiate the selling price (also known as the "agreed upon purchase price") of a leased car, just as you would if you were buying it. Julianna Makler, a consumer advocacy attorney in Santa Barbara, Calif., says that most customers have no idea that they can negotiate off the manufacturer's suggested retail price.
This is where it gets really tricky. Technically, leasing companies don't charge interest; instead, the finance fee is based on something called the "money factor." This is multiplied by your monthly net capital cost (the selling price minus rebates or trade-ins discussed above)
the residual value.
The money factor is a miniscule decimal that, when multiplied by 2,400, is equivalent to an interest rate. For example, a money factor of 0.00365 is equivalent to an 8.76% interest rate (0.00365 * 2400 = 8.76).
The problem is that dealers don't have to disclose the money factor. In fact, your salesperson may not even know what it is!
"A lot of times, dealers don't want salespeople to know, because it's complicated," says Tarry Shebesta, president and CEO of Automobile Consumer Services. "It takes more training."
Absent the money factor, consumers cannot check the monthly payment for mistakes or fraud, says Makler, the consumer advocacy lawyer.
She says dealers may figure the monthly payment on the basis of the list price, rather than the negotiated price of the vehicle. Or they may fail to credit you for a trade-in, add hidden fees or charges, or use a money factor that's out of line with the market without your knowledge.
"It's much easier to trick the consumer out of money if he or she doesn't know a crucial piece of the lease payment puzzle," Makler says.
The only way you can be sure you're not overpaying is to ask the dealer to give you the exact figures for the money factor -- and all of the other figures that are used to calculate monthly payments.
If your money factor seems abnormally high, Hearn says, the dealer may be inflating the rate, which you can negotiate down. Or it may mean that you've received a subprime rate based on mistakes in your credit report, something that's easy to fix.
For $19.95, Leaseguide.com sells a online "lease kit" with a number of features to make leasing more comprehendible. It includes rankings of vehicles by projected future wholesale retail value, estimate residual values for all vehicle makes, and a calculator to help determine how much you can afford to spend on a car.
The lease kit also provides a table of dealer profit margins on every vehicle model to help plot out your negotiating windows. The larger the profit margin, the more room dealers will have to negotiate on price.
Lexus and Porsche lead the list with profit margins of 13%, while Suzukis, Cadillacs and Audis, among others, average 8% or less.