Are you looking to lease a car but not sure how to pay for it? As in, you literally don’t know what’s going on with the finance side of a lease contract?
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You’re not alone. Except for professionals or super savvy researchers, few people know how the financial process of leasing a car works, and even fewer know how to use it to their best advantage.
Not understanding the process can cost you money: unexpected fees, not-so-prime rates and simply missing out on great deals you didn’t know were open to you, are all common mistakes inexperienced lessees make.
On the other hand, a little knowledge can really put you ahead of the game in the search for the best lease deal. You might be able to avoid common fees, benefit from special discounts and get a much better rate on a car than you thought you could otherwise.
In this article, I’ll explain exactly how a lease works financially, from the side of the banks that hold the lease, and also from the lessee’s perspective. Along the way, you’ll learn how to get the best possible deal on your next lease car.
How exactly does a lease contract work?
Before we can get down to the nitty gritty, first we have to understand how exactly the leasing process works.
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When you come to lease a car, your payments don’t go directly through the dealership or leasing company. The dealership actually sells the car to a bank, which then sets the lending price and is who you’ll be making your monthly lease payments to.
Many car manufacturers have their own banks. So if you lease a Honda it will go through Honda Financial Services, a Chrysler vehicle will go through Chrysler Capital and so on and so forth.
A few use normal consumer banks, like Mazda, which uses Chase Bank.
Finally, there are third-party banks. Several different brands offer deals on these banks. The three main third-party banks that you’ll typically see offered with a lease are US Bank, Ally Bank and CAL Automotive.
For some vehicles, you may be able to choose which bank to use. You can lease a 2019 RAM 1500, for example, with Chrysler Capital (the brand’s bank) or CAL Automotive, a third-party that works with Chrysler.
Which is better? It depends on the monthly rate and especially the rebates they offer you. (More on this in the next section.)
Here, it’s important to distinguish between leasing a car and financing. Both involve monthly payments, but when you finance a car, you own it at the end of the contract, whereas with a lease, you return the car to the dealership at the end of the lease. With financing, you can go to any bank that will approve your loan, whereas a lease agreement must go through a bank that works with your brand of car.
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Save money by qualifying for rebates
When you’re searching for the best deal on a lease car, look out for what’s known as rebates or incentives.
These are essentially discounts that only certain customers qualify for, trimming a few hundred dollars (or thousands) off of the lease contract.
Getting Your Lease
Some common incentives for new lessees are:
- Loyalty (for customers who have previously leased or owned a car from the same brand)
- Conquest cash (for customers whose previous car was a competing model from a rival brand)
- Corporate (for employees of certain participating companies)
- College graduate (usually recent grads of the last two years or next six months)
- Military (Army, Navy, Marines, Air Force, Coast Guard and National Guard)
Both third-party and car manufacturers’ banks often offer incentives.
As a general rule, third-party banks typically offer many more rebates. They also usually ask for higher monthly rates, but when you factor in the rebates, very often you’ll get a much better deal than with the brand. Just make sure to thoroughly compare and contrast offers from a couple of different lenders to make sure you are getting the best deal possible.
The one caveat is that, as you can see, the rebates aren’t available to everyone. Some of them also only apply to specific vehicle makes and models, like end-of-the-year clearance events or bonus cash to boost sales of certain models. You’ll have to check which ones you qualify for before you can make an informed decision. You can also check with a leasing agent to see what you qualify for, as they will be up to speed on what brands offer what incentives.
Returning Your Lease
At the end of a lease, you can also look out for incentives.
At the end of a lease, you will typically have to pay a disposition fee of $300-$600 to cover the costs of cleaning up and selling the car after you return it. Certain auto manufacturers will offer incentives to stay with them by waiving this fee if you sign up for another lease. Ah, the benefits of being a loyal customer.
Others offer a damage waiver on the next vehicle if you sign up with them again.
Breaking the lease
So, what happens if you want to get out of your lease before the contract period ends? This is an issue for many people. Maybe you’re moving across the country, maybe your kids are growing and need a bigger vehicle, maybe you can’t afford the payments anymore or, why not, you just feel like driving something new and flashy. YOLO, right?
In any case, terminating a lease early will almost always result in hefty fines. But depending on the bank, you may have an easy way out.
Some banks allow you to swap out, handing the lease contract over to another person, as long as it’s not within the first or last 6 months of the contract and the new lessee is approved by the bank. In some cases, your name will have to stay attached to the lease as a cosigner, so make sure the person you’re transferring the lease to is trustworthy. It could end up harming your credit if they default on the lease payments.
Some brands also have a pull-ahead program. If you’re close enough to the end of your lease period, they will waive the final monthly payments if you sign on to lease another car with them.
Getting approved: what do all those numbers mean?
Credit scores are often divided into levels: Tier 1, Tier 2, Tier 3 and so on.
Your ranking depends on a lot of factors: your credit, debt-to-income ratio, timing on past payments, how long you’ve had credit for and the strength of your credit history. It’s an indicator to the leasing company of how reliable you are as a customer, or what risk there is that you might start missing payments.
Another major factor that will determine your tier standing is if you have prior leasing history. Generally, if you have prior leases under your belt that are in good standing, chances are you’ll have an easier time getting approved and into a lower tier. Prior leasing history gives banks that extra peace of mind that you’ll be able to handle the responsibility of making your monthly payments on time, thus lowering the chance you’ll default on the payments.
If you are in good financial standing and have been paying your credit card bills on time for a while, you will probably qualify for a lower tier.
People with a lot of debt, a history of late payments or just not much history (such as young people who just got their first credit card) are considered much riskier. Or if you have too many accounts open, the bank might think you will be spread too thin, putting you in a higher tier. There are ways to boost your tier standing of course and increase your chances of credit approval.
I can’t say exactly what credit scores will put you in which tier, because this varies from company to company.
It also depends on the amount being requested for a lease. For example, if you go to lease a 2019 Jeep Grand Cherokee that costs $44,000, you might get approved for Tier 3. But if you go for a $27,000 2019 Jeep Compass, the same credit history could put you in Tier 1.
Getting into a low tier has a lot of benefits. You will be offered prime rates and even qualify for the very attractive sign-and-drive lease option. In the higher tiers, you’re looking at higher monthly payments and possibly extra fees.
Don’t give up if you don’t make it into Tier 1! You can get a tier bump if you have a co-signer who has a better credit score and history than you. (This person acts as a sort of guarantor who will cover your monthly payments if you can’t.)
Fees and how to avoid them
With any lease, be aware of extra fees that you might face when you return the car to the leasing company.
- Disposition fees. As I mentioned earlier, you generally will have to pay a few hundred dollars for the car’s cleaning and resale, unless the bank waives this fee when you sign up for another lease with them.
- At the end of the lease, you will be responsible for any damage to the car. Some brands, such as Mazda and Honda, offer a damage allowance. With others, you can purchase a damage waiver that will cover several thousand dollars’ worth of repairs.
- Over mileage. Lease contracts specify how many miles you can drive. If you go over the allowed mileage limit, you’ll get hit with fees of $0.15-$0.30/mile depending on the brand, make and model of the vehicle. This might not seem like much, but it can add up to a hefty bill. These fees are in place to cover the additional depreciation costs that the car accumulates with every mile over the agreed limit. When you sign your lease, the bank estimates what the value of the vehicle will be at the end of the lease given the lease terms (AKA the residual value) so, obviously this valuation will be way off if the car comes back severely over the allotted miles. Long story short, keep an eye on those miles and you won’t have to worry about handing over a check when you hand back your car.
How do the banks measure up?
So what’s the best bank for handling a car lease? Every situation is different, but here’s a quick run-down of how some of the major companies compare.
Nissan: 2 months
Cadillac: 2 months
Lexus: 3 months
BMW: 2 months (sometimes)
MB: 5 months
Toyota: 6 months
Volvo: 9 months
Lease swapping allowed
Honda: $500 or $1,000 if you lease again from them
Mazda (Chase Bank): $1,000
Nissan: $500 if you lease again
MB: $500 if you lease again
Nissan, Chrysler Capital and Toyota generally don’t offer damage waivers. However, they tend to be more lenient when it comes to the damage inspection.
CAL and HANN Bank allow you to purchase wavers that cover up to $5,000 in damages. However, they also tend to charge you for every little scratch or dent they can find.
Generally, Ford is the most lenient brand when it comes to credit approvals, so this may be your best bet if you’ve had challenges with other brands.
CAL usually offers the best rates, but to get approved you will need a very strong credit score (720 or more) and a low debt-to-income ratio.
Leasing a car can be a complicated process, packed with obscure terminology and endless numbers, percentages and conditions. This is why it’s always good to work with a trustworthy leasing company whose staff will take care of the details. Capital Motor Cars, for example, prides itself on being just that.
In general, to find a good deal, you have to take a few key factors into account: monthly payments, rebates, and possible fines or fees at the end of the lease. Knowing how to work with your credit tier and how the system of brands and third-party banks works will give you a leg up on scoring the best possible deal.