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Auto Residual
Value, Auto Lease-End Value, Auto Guaranteed Value Estimated Wholesale:
All four of these terms are used to identify the vehicle's projected
wholesale value at the time the auto lease term expires. This
value is established at the start of the auto lease by the leasing
company and varies according to lease term, mileage allowance, make and model.
Auto Residual
Calculation:
The auto leasing company is able to calculate the residual from studying the history of Kelley
Blue Book wholesale value. The study proves the percent of value the aged vehicle
will retain of its original MSRP. The percentage is then applied to the MSRP of the lease
vehicle to express the residual value in dollars. (i.e., MSRP $20,000 times' 60% = $12,000
residual).
MSRP.
The manufacturers suggested retail price. As explained, the vehicle's MSRP and the
residual percentage are the two factors used to calculate the residual value. Generally, a
high residual value (projected wholesale value) will give the auto lease customer more car
and more luxury for less payment. In other words, if all vehicles had the same MSRP, the
one with the highest projected wholesale value would be the most attractive lease.
Refundable Security
Deposit.
A security deposit is a cash deposit made at the beginning of the auto lease to be held
until lease end as a security for performance of all obligations. The security deposit is
usually equal to one month's payment. With some auto leases, the deposit can be waived
upon the customer's request.
Money
Factor.
The rate used by the auto leasing company to calculate the auto lease's total rental
charges (service charge). The money factor is expressed in a figure, i.e.,(.00189). Generally,
the lower the money factor, the less your payments will be.
However, it is important to note that the Federal Government has adopted
a mandated revision of "Federal Regulation M" (The law governing consumer lease
disclosures). The new law became effective October 1, 1997. The
revisions govern every consumer auto lease contract offered in the United States
regardless of the leasing source, whether manufacture, national associated bank, state
chartered bank, national fleet bank, credit union, independent lease dealer, new and used
car dealers.
The newly revised regulation prohibits the use of any
language, oral or written, that implies auto lease charges are the same as or similar to
an interest rate, APR, or financing charge. As a result of the new regulation, the money
factor will not be disclosed on any lease agreement. The factor will not be disclosed
because there is no interest or financing charge associated with an auto lease. Instead,
each and every consumer lease agreement written in the United States will only disclose
the actual and true charges of an auto lease. Each and every auto lease contract will
disclose:
1. The agreed upon value of the vehicle.
2. The amount of any rebate, cash payment, net trade-in
allowance or non-cash credit that reduces the agreed value of the vehicle.
3. The value of the vehicle at the end of the lease
that is used to calculate the base monthly payment.
4. The total of depreciation and any amortized amounts
to be paid over the term of the lease.
5. The total of all rental charges to be paid over the
term of the auto lease in addition to the depreciation and any amortized amounts.
6. The total of depreciation and any amortized amounts
plus the rental charges.
7. The base monthly payment.
8. The monthly sales/use tax to be added to the base
monthly payment.
9. The number of months in the auto lease.
10. The total monthly auto lease payment.
11. The purchase option price.
12. The excessive wear and use charges if they are
applicable.
Simply, and as it should be, it will
be easy to understand that the total lease costs are limited to the sum of
depreciation and any amortized amounts and rental charges. The bottom
line total divided by the lease's number of months will equal the amount of each base
monthly payment. In other words, the new regulation simplifies the calculation of auto
lease costs and the computation of monthly payments. Furthermore, the revised calculations
will make the value of leasing indisputable.
Use Tax.
A state tax included in each monthly auto lease payment. The total use tax amount is
substantially less than the original sales tax charged on a purchase price.
Capitalized Cost
Reduction:
An optional initial payment (down payment) on an auto lease that can significantly reduce
your monthly payments. The leasing company may take a trade in instead of, or in addition
to, a cash payment.
Low Mileage Auto
lease.
A lease that provides a higher residual for low mileage drivers. 10,000 and 12,000 miles
per year may quality the driver for a lower monthly payment.
Excess Mileage:
The standard 15,000 miles per year allowance covers most drivers. However, if you feel you
will be driving over the 15,000 mile limit, you can add the mileage to your lease.
The mileage can be paid as part of your monthly payments at a rate as low as 8 cents per
mile. This "mileage up front" system will also lower the auto lease-end value of
the vehicle by the same amount. It's important that you determine - as
close as possible - the mileage you will drive. If you prepay for additional mileage and
do not use it all, some auto leases refund unearned, but prepaid miles. Your refund will
be equal to the original mileage rate used to calculate the amount of prepayment. The
refund is paid providing the total is greater than $1 and you do not elect to exercise the
Purchase Option. If you exceed 15,000 miles per year and do not prepay to include excess
miles up front, you will be charged for all extra miles at lease end. The excess miles'
rate varies between auto leasing companies. The average excess rate is 13 cents per mile.
Of course, if you decide to purchase your vehicle at lease end, or sell it yourself to
make a profit, you will not incur any excess mileage charges.
End of Lease.
You have four options: 1) return the vehicle and lease
again; 2) check the market value and buy it to keep; 3)
or buy it and sell at a profit; 4) walk away risk free.
Purchase Option:
An option written into an auto lease at its start that gives the
lessee the opportunity to buy the vehicle at lease end for a predetermined price.
Lessee.
The customer who leases the vehicle from a dealer or leasing company.
Lessor.
The dealer or leasing company that leases the vehicle to the customer.
Term Of Lease
Auto Lease terms range between 24 months and 66 months. As in conventional financing, the
monthly payments vary with the monthly term. As a rule of thumb, the monthly payments are
lowest on a 66 month lease and highest on a 24 month lease. To determine the length of
auto lease that works best for you, begin by picking the monthly term where the payments
fit your budget. You should also consider the specific time when you will want your next
new vehicle. Sound planing on your part is important.
Early Termination
Option:
Most auto leases can be early terminated on any month during the term
for a $250 fee. In other words, the lessee can pay $250, cancel the lease before the term
expires and return the vehicle to the lessor. The lessor then liquidates the vehicle at
the wholesale price. If the wholesale price is less than the present lease balance, the
lessee is responsible for the difference. However, the lessee may sell the vehicle at a
retail price, trade it or buy it outright for the present lease balance to erase all
liabilities. Buying, selling or trading the vehicle will also erase excess miles and
excess wear and tear.
Vehicle Valuation at
Early Termination:
When a vehicle is returned early, the lessee may obtain an independent
appraisal of the vehicle's wholesale value from a qualified appraiser. If the
lessee chooses not to use an independent appraiser, the lessor is required to
obtain 3 bids to purchase the vehicle at wholesale. The highest bid is used to
determine the lessee's early termination responsibility.
Gap Waiver:
If the auto lease is terminated early, as a result of the total loss of the vehicle due
to: collision; destruction; theft, the lessor will waive any loss not paid by your primary
car insurance. Gap insurance is an important benefit offered by most lessors.
Insurance:
All lessors require that you pay for and maintain your own car
insurance during the term of the lease. The minimum coverage's are: public liability
$100,000/$300,000; property damage $50,000; collision maximum deductible $500;
comprehensive including fire and theft maximum deductible $500.
Wear and Tear:
If you keep your vehicle in good condition and follow the manufacturers scheduled
maintenance recommendations, you should not have any problems with excess
wear and tear. Here's what to do to help keep wear and tear at a minimum:
Protect the vehicle's paint finish with regular washes
and waxes.
Rotate the tires regularly and keep them properly
inflated to minimize tire wear.
Replace any items that have been lost or damaged. This
may include outside mirrors, hubcaps, antennas, etc.
Repair any major dents or body damage and any chips and
cracks in the windshield.
Closed-end versus
Open-end Lease:
Closed-end and open-end refer to who bears the risk of the vehicle's worth
at the end of the lease. At the end of a closed-end lease, the lessee can safely walk away
as the lessor bears the market valuation risk. On the contrary, at the end of an open-end
lease, the lessee shares in the risk of the market value as the vehicle could be worth
less than the estimated wholesale. A closed-end lease, therefore, is safer and preferred
over an open-end lease. Holdback policies and amounts can change often, and
vary from dealer to dealer |