Jill Merriam Key Hyundai Blog

My Friend Allison Asks Should I Lease or Buy a Car?

April 24, 2010

My good friend Allison is in the market for a new car.  Her brother ran on tough times and she is giving him her Nissan Pathfinder.  She’s a really good person.  I know her because my son Brady has been in school with her son for the past three years. 

She is in the market for a small SUV.  I pretty much convinced her to buy a 2010 Hyundai Tucson but she really wanted to go see the Toyota Venza.  So, she schlepped off to a CT Toyota dealer today by herself.

Fastforward about six hours and I’ve gotten six frantic calls from her.  What’s most amazing is just how confusing the process is to her.  Now, Allison is a highly educated executive at a major Hartford company.  I mean, she is super smart, super well-respected and makes a ton of money.  And, all her inquiries were around the topic, “Am I getting a good deal?”  The CT Toyota dealer quoted her a payment of $412 a month for a three year lease. 

What I explained to her is a leasing is just the financing mechanism.  Whether you lease or buy a car, what you need to be comfortable with is the sales price of the car.  That is what is negotiable.  Almost everything else is non-negotiable. 

There are three components that go into calculating a lease payment.  I told Allison to get me all three components and we could figure out what the payment should be (plus any origination fees, doc fees and registration fees). 

The first component is the price of the car.  What you are paying for in a lease is the depreciation on the car from the time your lease begins to the time the lease ends.  The value of the car at the end of the lease is called the residual value (the second component).  That value is determined by a third party called ALG and is non-negotiable.  For example, everyone buying a 2011 Hyundai Sonata GLS with an MSRP of $25,000 receives the same residual value.  So, you are in essence, financing the price of the car when you lease it less what the car is worth at the end of the lease.  So, in order to shrink the value of that depreciation, the only thing you can do is pay less for the car.  That is the piece that is negotiable.

Finally, there is a money factor (a fancy term for an interest rate and component #3) applied to the amount of money you are borrowing (the depreciation).  That number is also dictated by the automotive manufacturer and is also non-negotiable.

By getting all the numbers, Allison was able to run the lease payment through an online calculator and realize that the Toyota dealer was “padding the payment” a bit so that when she said, “well, if you can get me under $400,” he could do that without having to lower the price any further.  As I told Allison, it’s not the worst sin I’ve ever seen, but it certainly wasn’t totally above board.

Anyways, I hope this post has helped to educate you on what to consider when leasing a car.  You should always feel free to ask the car dealer that you’re buying the car from for:

1.  The price of the car.

2.  The residual factor

3.  The money factor

4.  Any additional fees itemized for you.

My name is Jill Merriam.  I am the owner of Key Hyundai of Manchester, CT and Key Hyundai of Milford, CT and the Dealer for the People.

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