Leasing is a relatively straight forward concept to grasp if a small amount of time is invested to understand it. Unfortunately, most of those choosing to lease have little, if any idea how their contracts were structured, and subsequently how their monthly payments came to be. In the majority of cases, as a result of not putting in the time to learn about the process and grasp the leasing lingo, the vast majority of people substantially overpay on their leases, overpayments that in many cases quite literally easily extend into the thousands! Not surprisingly, this is the main reason the majority of unsavory dealerships love leasing, as they are able to slip in extra profit margin for themselves that blends into the mix so nicely that an un-savvy lease customer wouldn’t ever realize it even happened. An ancillary benefit dealers enjoy is that at the end of your lease term you’ll be back in the market for another vehicle, at which time they’ll be more than happy to be of service in getting you fixed up with your new ride. Of course, whether that servicing applies to you or to them is at best uncertain.

We can’t stop thinking how investing a couple of hours to become educated on the process, in addition to investing a very small amount of money up front to secure the information required that will allow one to negotiate from a position of strength would in essence “pay” the average lessee hundreds of dollars per hour for their effort. Yet, most are unable to find the time, or worse, are far too trusting of the dealer to structure their lease payments with their interests in mind. The irony of this scenario is that we’re willing to bet that not one of these same people would turn down the chance to earn several hundred dollars per hour working an odd job over the course of a weekend afternoon if the opportunity presented itself.

Where we think the concept of leasing goes wrong for most people who have not taken the time to understand it, is that they regard it solely as a cheaper means to attain a vehicle, rather than recognize it for a financial mechanism that is cleverly arranged to fund the use of it. In other words, most people concentrate on how much their payments are, rather than what they’re paying for. This pleases the majority of dealerships who of course know leasing inside-and-out and backwards-and-forwards. The more unscrupulous salespeople like it because it provides good cover to fleece those customers who aren’t familiar with how their monthly payment numbers came to be figured. They know that all things being equal, in most cases your payments will still be significantly cheaper on a monthly basis for a lease you unknowingly got taken advantage on, relative to a vehicle purchase that truly was a good deal. Many might remember the popular slogan of a well regarded retail clothing chain that states “an educated consumer is our best customer.” Unfortunately, at more dealerships than not, an uneducated lessee is their most profitable customer!

Since you’re reading this, we’re pleased that you are smart enough to be in the minority of those who understand the value of spending some time to get educated on the process in an effort to thwart the dealership from taking advantage of what otherwise would have been your lack of knowledge. This is the exact sentiment that prompted us to offer this site as a resource to help the car buying and leasing public.

The Basic Concept of Leasing

One way to think about leasing is to regard it as a very long term rental, usually three years or longer. Rather than purchasing the vehicle and paying for, or financing the entire cost, you instead pay for the portion of the vehicle you use during the time you’re driving it (also known as its depreciation). The party actually buying the vehicle is a leasing company. They’re referred to as “the lesser” and are similar to a bank or the manufacturer’s captive finance company in a purchase arrangement. The leasing company also charges you a fee that allows them to be reimbursed for their cost of outlaying the money used to purchase the vehicle from the dealer, while realizing a profit for this service. We’ll look at this in detail later, but for now just understand that the two elements making up a lease payment are (1) the portion of the vehicle being depreciated during the time you’re driving it and (2) an added fee that the leasing company charges for use of their money.

The Cardinal Rule of Leasing

Before we explore the 4 major components of leasing, let us begin by saying that if we had to pick just one point to drive into the consciousness of those about to lease a vehicle, it would by far be:

Making the decision to lease should never preclude you from systematically negotiating the price, fees and add-ons of a vehicle in exactly the same manner you would if you were buying it.

Purveyor of Nonsense Alert:

Don’t ever let a salesperson get away with telling you that negotiating the price of the vehicle you’re about to lease shouldn’t be of concern.

The tired old stock line many salespeople direct at someone they know isn’t savvy about leasing goes something like…“Why do you care what the sales price is?...You’re not buying the vehicle, you’re just leasing it….The leasing company is buying it.”

In our opinion, this borders on outright fraud when a dealership representative makes such a statement, because no one knows better than they do that one of the biggest components determining your monthly payment is the vehicle’s final selling price, known as capitalized cost in leasing parlance.

Unfortunately, this garbage is still perpetuated in many dealerships across the country, which we can attest to first hand since we hear it all the time when we’re at the dealership leasing our own new vehicles or accompanying family and friends who are leasing theirs.

After reading this section on leasing, you’ll understand why negotiating the price of the vehicle is immensely important. How you handle the salesperson dishing out this slop when you encounter it is up to you.

Below we’ll take a look at the math that explains why it is very much in your interest to care greatly about the price of the vehicle when leasing. For starters though, understand two incontrovertible leasing facts:

First, from the perspective of the dealer’s bottom line, nothing is inherently different - whether the dealer is writes up a purchase or lease contract, the transaction is always a sale for the dealer and with that being the case, it’s always in their interest for the price of the vehicle to be as high as possible. The only difference is that with a lease the dealer is selling the car to a leasing company (who in turn leases it to you) rather than their selling it directly to you, as they would with a purchase.

Second, the higher the final price of the vehicle (the capitalized cost), the higher the payments will be – always!

A logical thought one might have, is if the leasing company is buying the vehicle, why doesn’t it send a representative on its behalf to negotiate the price of the vehicle with the dealership, or at minimum, have preexisting pricing agreements in place for each make and model? The short answer is that the leasing company couldn’t care less about what the selling price is, as they don’t stand to gain or lose anything based on the outcome of the final sales price of the vehicle. Instead, it is you, the lessee, who will absorb the full financial impact of a high selling price, should you allow the dealer to get away with making it such. Below we show you why.

Leasing Demystified

The basic concept of leasing is remarkably simple to understand. First, we’ll take a look at each of the main lease components that determine your monthly payment, while giving you the key pieces of information, tips and insight you’ll need on each to be certain you’re not being taken advantage of in one or more of these areas.

After that, we’ll look at a typical lease example, showing how these lease components all come together to calculate a typical lease payment.

Next, we’ll run through a number of additional lease scenarios, looking at each from a slightly different angle or perspective to further hone your understanding of how a monthly payment is arrived at. After grasping these scenarios, you should feel more comfortable running your own lease numbers in the showroom since there’s more than a good chance the dealer will try to inflate their profit somewhere in your lease contract.
Finally, we’ll take a look at all the residual considerations one need pay attention to when leasing.