How to Spot a Good Lease
Every month lease specials are advertised with eye-popping low payments to entice the buying public to add that brand's car keys to their pockets. Sometimes these advertised specials represent a genuinely good deal. In other cases, as we shall see, they are just designed to get the customer into the showroom so the sales staff can practice their up-selling skills.
We will examine the BMW 3 Series as a test case. The BMW 325i is a vehicle lauded by both the editors at Edmunds.com and consumers alike. Year in and year out it is heralded as the benchmark for entry-level luxury sport sedans, and even at the end of the current generation's lifecycle, it remains a top seller.
In addition to its reputation as an amazing sport sedan, the 3 Series is also known as being pricey, especially when compared to many of its competitors. While a 325i may start out under $30K, adding in a few desirable options can cause the price to rise considerably. A typical 60-month loan can see a monthly payment soar above $500 per month.
Recently, BMW Financial Services offered what appears to be an amazing lease deal; a 24-month lease on a 325i for $289 per month, or a little more than half that $500 per month! Wow! For the monthly payment that you might make for an economy car, you could be driving a BMW.
Sure, this is only a lease, so you never actually own the car. The purpose of this article is not to debate the pros and cons of leasing vs. buying. And we don't mean to single out BMW as creating misleading advertisements ― nearly all the carmakers have similar come-ons. Suffice it to say that many people find leasing desirable and it allows most manufacturers to advertise low monthly payments. But the question remains: Is this lease really the deal it appears to be? Let's find out.
The Lease Details
BMW advertises a monthly payment of $289 per month, for 24 months for a BMW 325i sedan with automatic transmission, sunroof and heated seats. Not loaded, but not a stripper either. You have to cough up a down payment of $2,500, your first month's payment of $289 and a security deposit of $300 for a total out of pocket of $3,089 due at signing (plus the small print items, but we will get to that later). For those unfortunate enough to live in New York, you must also pay an additional $800 acquisition fee to cover that state's hopelessly out-of-date vicarious liability laws.
So, is there a catch? And if so, what is it? Well, there is a catch. In fact, there are four catches. Let's examine each one and see how they change the scope of this deal.
Down Payment
The first catch is the amount you have to put down, $2,500. Now, for most people when they buy a car, putting $2,500 down does not seem like a big deal. Putting money down when you finance a car is commonplace so you will, at some point, have enough equity to recoup your down payment and lower your monthly payment. The latter is true with a lease, too, but the former does not apply. Putting money down on a lease simply means you are paying some of your rent (and leasing is essentially renting) upfront, thus making for a lower monthly payment.
To put this another way, let's say you were going to rent an apartment and that apartment had a monthly rent of $1,200. Now, suppose the landlord told you that if you paid $1,200 upfront your rent would only be $1,100 per month. How many of us would do that? Not many we would guess. Well, the same holds true when you lease a car. Whether you pay it upfront or during the course of the lease, the total outlay is the same, therefore there is no real advantage to making a down payment.
There is, however, a big disadvantage when you put money down on a lease. Let's say you have put $2,500 down on your lease and the car is either stolen or wrecked. Well, your insurance and the gap coverage will pay off the car. But your $2,500 will never be seen again since it was used at the beginning of your lease to reduce your monthly payment. So, why gamble with your money? The smarter move is to keep that money that you would have used as a down payment in an interest bearing account and make payments from it each month. You will accomplish nearly the same thing as putting the money down, while assuring that your money is safe in the event something unforeseen happens to the car.
So, if we take away the $2,500 down payment, our $289 monthly payment suddenly jumps to $396 per month, or over $107 per month more! Now you see why many advertised leases have a significant down payment, as it can dramatically reduce your monthly payment (but not the total you will pay for the entire lease).
Mileage Limits
What's the next catch? Well, how about the allotted mileage? This lease includes 10,000 miles per year, or a total of 20,000 miles. That sounds like a lot, right? Well, it really isn't. Even people who work from home have little trouble putting 10,000 miles (or more) per year on their cars. It's doubtful that most people can deal with that kind of mileage limitation. If we changed the lease to include 12K miles a year, the payment rises to $409 a month, or $13 a month more.
But even this higher mileage limit is hard to stay within. The fact is that most people tend to drive at least 15,000 miles per year. When you are leasing, you want to be sure you don't go over your allowed miles, as it can be costly. Most leases these days typically charge 20 to 30 cents per mile over your contract miles (BMW charges 20 cents). The additional 5,000 miles per year, or a total of 10,000 miles over the course of our 24-month lease could cost an additional $2,000! Adjusting this lease example to include the more realistic 15,000 miles per year would increase the payment to nearly $435 per month, or $39 a month more than the 10,000-mile-per-year lease.
Sales Tax
There is still a third bump in the road…the sales tax. The government wants its piece of the action, too, and this is where the small print comes into play. The small print states that the payment excludes sales tax (along with registration and title fees). How much can that possibly be? It depends on where you live. Some states, like Texas, charge sales tax on the entire selling price of the vehicle (the capitalized cost, in leasespeak). Most states, however, only charge sales tax on the monthly payment. Let's take an average sales tax rate of 6%. If the sales tax were charged on the entire selling price of the vehicle, you would have to come up with an additional $1,876. If the sales tax were charged only on the monthly payment, the additional monthly amount would be $26. This brings our monthly payment up to $461 or $172 per month more than the advertised payment!
Negotiating the Cap Cost
Here is a catch that actually works in the buyer's favor. Most advertised leases are based on a selling price that is higher than what one could reasonably expect to pay. In this case, the lease is based upon paying $31,270 for the car. However, the Edmunds.com TMV price for the same car in the Los Angeles area is $30,971. If this were the price paid for the car, the lease price would drop to $447 per month. You might be able to negotiate an even lower price on the car. Every $100 you negotiate off the price of the car saves you about $5 per month. The message here is that you should never let the manufacturer determine the price of its car for you. Chances are it doesn't have your best interest at heart.
Summary
So, our $289 per month BMW is in reality $447 per month. Is this an amazing deal? Well, that is for you to decide, but let's also put this into context. If you had purchased this same car and financed over five years at an available 4% interest, you would have to put down over $6,700 (plus sales tax) to get the same $447 per month payment. Putting no money down would net you a monthly payment of more than $570 for 60 months. Of course you would then own the car, but it is still interesting to compare the payments nonetheless.
What is the lesson here? It is essential to read the small print and make sure that the terms that are being advertised will fit into your lifestyle and budget. BMW is not unique in the way it advertises its leases. Most luxury brands will advertise leases with only 10,000 miles per year, and almost no manufacturer advertises a lease with less than a $1,000 down payment.
Every month lease specials are advertised with eye-popping low payments to entice the buying public to add that brand's car keys to their pockets. Sometimes these advertised specials represent a genuinely good deal. In other cases, as we shall see, they are just designed to get the customer into the showroom so the sales staff can practice their up-selling skills.
We will examine the BMW 3 Series as a test case. The BMW 325i is a vehicle lauded by both the editors at Edmunds.com and consumers alike. Year in and year out it is heralded as the benchmark for entry-level luxury sport sedans, and even at the end of the current generation's lifecycle, it remains a top seller.
In addition to its reputation as an amazing sport sedan, the 3 Series is also known as being pricey, especially when compared to many of its competitors. While a 325i may start out under $30K, adding in a few desirable options can cause the price to rise considerably. A typical 60-month loan can see a monthly payment soar above $500 per month.
Recently, BMW Financial Services offered what appears to be an amazing lease deal; a 24-month lease on a 325i for $289 per month, or a little more than half that $500 per month! Wow! For the monthly payment that you might make for an economy car, you could be driving a BMW.
Sure, this is only a lease, so you never actually own the car. The purpose of this article is not to debate the pros and cons of leasing vs. buying. And we don't mean to single out BMW as creating misleading advertisements ― nearly all the carmakers have similar come-ons. Suffice it to say that many people find leasing desirable and it allows most manufacturers to advertise low monthly payments. But the question remains: Is this lease really the deal it appears to be? Let's find out.
The Lease Details
BMW advertises a monthly payment of $289 per month, for 24 months for a BMW 325i sedan with automatic transmission, sunroof and heated seats. Not loaded, but not a stripper either. You have to cough up a down payment of $2,500, your first month's payment of $289 and a security deposit of $300 for a total out of pocket of $3,089 due at signing (plus the small print items, but we will get to that later). For those unfortunate enough to live in New York, you must also pay an additional $800 acquisition fee to cover that state's hopelessly out-of-date vicarious liability laws.
So, is there a catch? And if so, what is it? Well, there is a catch. In fact, there are four catches. Let's examine each one and see how they change the scope of this deal.
Down Payment
The first catch is the amount you have to put down, $2,500. Now, for most people when they buy a car, putting $2,500 down does not seem like a big deal. Putting money down when you finance a car is commonplace so you will, at some point, have enough equity to recoup your down payment and lower your monthly payment. The latter is true with a lease, too, but the former does not apply. Putting money down on a lease simply means you are paying some of your rent (and leasing is essentially renting) upfront, thus making for a lower monthly payment.
To put this another way, let's say you were going to rent an apartment and that apartment had a monthly rent of $1,200. Now, suppose the landlord told you that if you paid $1,200 upfront your rent would only be $1,100 per month. How many of us would do that? Not many we would guess. Well, the same holds true when you lease a car. Whether you pay it upfront or during the course of the lease, the total outlay is the same, therefore there is no real advantage to making a down payment.
There is, however, a big disadvantage when you put money down on a lease. Let's say you have put $2,500 down on your lease and the car is either stolen or wrecked. Well, your insurance and the gap coverage will pay off the car. But your $2,500 will never be seen again since it was used at the beginning of your lease to reduce your monthly payment. So, why gamble with your money? The smarter move is to keep that money that you would have used as a down payment in an interest bearing account and make payments from it each month. You will accomplish nearly the same thing as putting the money down, while assuring that your money is safe in the event something unforeseen happens to the car.
So, if we take away the $2,500 down payment, our $289 monthly payment suddenly jumps to $396 per month, or over $107 per month more! Now you see why many advertised leases have a significant down payment, as it can dramatically reduce your monthly payment (but not the total you will pay for the entire lease).
Mileage Limits
What's the next catch? Well, how about the allotted mileage? This lease includes 10,000 miles per year, or a total of 20,000 miles. That sounds like a lot, right? Well, it really isn't. Even people who work from home have little trouble putting 10,000 miles (or more) per year on their cars. It's doubtful that most people can deal with that kind of mileage limitation. If we changed the lease to include 12K miles a year, the payment rises to $409 a month, or $13 a month more.
But even this higher mileage limit is hard to stay within. The fact is that most people tend to drive at least 15,000 miles per year. When you are leasing, you want to be sure you don't go over your allowed miles, as it can be costly. Most leases these days typically charge 20 to 30 cents per mile over your contract miles (BMW charges 20 cents). The additional 5,000 miles per year, or a total of 10,000 miles over the course of our 24-month lease could cost an additional $2,000! Adjusting this lease example to include the more realistic 15,000 miles per year would increase the payment to nearly $435 per month, or $39 a month more than the 10,000-mile-per-year lease.
Sales Tax
There is still a third bump in the road…the sales tax. The government wants its piece of the action, too, and this is where the small print comes into play. The small print states that the payment excludes sales tax (along with registration and title fees). How much can that possibly be? It depends on where you live. Some states, like Texas, charge sales tax on the entire selling price of the vehicle (the capitalized cost, in leasespeak). Most states, however, only charge sales tax on the monthly payment. Let's take an average sales tax rate of 6%. If the sales tax were charged on the entire selling price of the vehicle, you would have to come up with an additional $1,876. If the sales tax were charged only on the monthly payment, the additional monthly amount would be $26. This brings our monthly payment up to $461 or $172 per month more than the advertised payment!
Negotiating the Cap Cost
Here is a catch that actually works in the buyer's favor. Most advertised leases are based on a selling price that is higher than what one could reasonably expect to pay. In this case, the lease is based upon paying $31,270 for the car. However, the Edmunds.com TMV price for the same car in the Los Angeles area is $30,971. If this were the price paid for the car, the lease price would drop to $447 per month. You might be able to negotiate an even lower price on the car. Every $100 you negotiate off the price of the car saves you about $5 per month. The message here is that you should never let the manufacturer determine the price of its car for you. Chances are it doesn't have your best interest at heart.
Summary
So, our $289 per month BMW is in reality $447 per month. Is this an amazing deal? Well, that is for you to decide, but let's also put this into context. If you had purchased this same car and financed over five years at an available 4% interest, you would have to put down over $6,700 (plus sales tax) to get the same $447 per month payment. Putting no money down would net you a monthly payment of more than $570 for 60 months. Of course you would then own the car, but it is still interesting to compare the payments nonetheless.
What is the lesson here? It is essential to read the small print and make sure that the terms that are being advertised will fit into your lifestyle and budget. BMW is not unique in the way it advertises its leases. Most luxury brands will advertise leases with only 10,000 miles per year, and almost no manufacturer advertises a lease with less than a $1,000 down payment.
