Leasing Help

ThirtyOne

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I'm getting the feeling with the sticker shock some buyers may consider leasing for the first time.

This is NOT a "Is leasing good or bad?" thread. Please don't post opinions on that here.

This is a thread to explain some of the mechanics and quirks of leasing.

I can answer some questions like:

- Why is the lease payment less on a 4-door sport and than a 2-door sport?
- Why does it sometimes make sense to add options to your Wrangler to get the payment lower?
- How do I compare a lease deal to a loan deal?
- Is it possible to get a lower payment from a loan than a lease?
- Should I put money down on my lease?
- What is a good money factor for my Wrangler?
- The residual values are too low! Can I negotiate them?
- The residual values are too high! Should that scare me?
- My friend doesn't lease but he gets a new Wrangler every 18 months and his payments go down every time! How is that possible?!

Disclaimer: I am not a car financing professional. I am just old and have a lot of experience in car leasing and purchasing as a consumer. I have never leased a Wrangler though I did put a lease deal together a couple of years ago that I walked away from. Others may have more experience and they can weigh in. That would be great! I am hoping to learn something too before I make my final decision.





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ThirtyOne

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Here was a question from another thread from someone who is concerned about leasing:

"Forgot to mention I plan on buying it out at the end, which is why I'm worried about it's high resale value"

TLDR: I looked up resale on 3-year old Saharas and based on Kelley Blue Book they are at about 90%. Your lease residual will be something like 65%. You can buy it out with a loan and flip it and end up with a nice chunk of change. Even if you did end up upside down with a residual higher than the value (unlikely on a Wrangler but I can't predict the future) it is not the disaster you think. Lenders will loan you up to 125% of that value so you can refinance and your payments may actually go down! Or you can just walk away (at a cost) if you can't get a loan or some other unforeseen circumstance. but that cost is probably lower than the money you saved.

It gets to one of the basic fears of leasing and it is one of the areas where the Wrangler is somewhat unique.

Why do we lease? To get a lower payment! That is ok. Embrace it. Everyone tells you you should not be a "payment" buyer. Because it makes you do things that are not financially sound. And they are right. But if you go in eyes wide open you can make it work for you.

I will say this - if you are going to lease then be a payment buyer! Get that payment as low as possible. And sometimes that means doing things that don't seem to make sense.

Back to the question: Should you be concerned about resale value of your jeep at the end of your lease?

One of the things that people say is bad about leases is that as a payment buyer you want the residual value to be as high as possible. I will explain this more later. but that means the cost of your Wrangler at the end of the lease will be higher and you could end up "upside down" where you owe more than it is worth. That is bad! Right?

Well, not so much. First of all, the Wrangler is a good lease vehicle because the residual values are relatively high. Which does mean you will owe more at the end of the lease. But Wrangler resale is so ridiculously high that you will almost always be ahead. And I don't mean a little ahead. I mean a lot (see above). You will still have plenty of equity to get a loan at the end or sell the Jeep and take the cash, pay off the loan, and use the remainder to buy (or lease!) another car.

But what about that doomsday scenario. I lived it with another car. I came out of a lease where we had gone way past the mileage limits. We had to buy it out and I was upside down in it because of the mileage. The leasing company gave us a loan and our payments actually went down. Now, I had a payment on that car for a long time and kept it for 11 years. It had about 225,000 miles at the end and luckily no major issues. And I still had many years with no car payment at all. It wasn't terrible.

The other concern people have is that the vehicle is going to get wrecked and lose its value and you are going to be upside down for that reason. Leases these days come with what they call Gap Insurance rolled in so you won't get stuck making payments on a car with no value that you can't drive. The insurance will pay it off. And if you just end up in a diminished value situation you may have to pay some fees and walk away. But let's say you save $100-150/month for 39 months. That is almost $4,000-$6,000. It is probably worth the risk.
 

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Ahh, I finally understand now, thank you.

These links also helped me clear things up
https://cars.usnews.com/cars-trucks/what-does-residual-value-mean-for-a-car-lease
https://budgeting.thenest.com/happens-return-lease-equity-22543.html
https://www.cartelligent.com/blog/understanding-lease-end-options-residual-value-vs-market-value

Also, do you know how would trading in a vehicle that's worth more than the estimated lease depreciation?
Does the dealer just write you a check for the difference?
It would be nice to somehow be able to put the equity towards the buyout (if you chose to) for tax purposes.
 
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The dealer usually just makes it part of the deal like a trade.
 

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So if the Sahara is 45k with residual of 30k, but market value is actually 40k after 3 years.
I would have made 15k in payments, BUT I'm up 10k, so I really only paid 5k for the 3 years I leased, and I get to buy it out at 30k, which means I only paid 35k total for a 45k Sahara?!
 
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So if the Sahara is 45k with residual of 30k, but market value is actually 40k after 3 years.
I would have made 15k in payments, BUT I'm up 10k, which means I really only paid 5k for the 3 years I leased, and I get to buy it out at 30k, which means I only paid 35k total for a 45k Sahara?!
Yes. But to get that $10k you have to monetize your jeep. If you keep it then it will continue to depreciate and you won't get the $10k out. That is the catch.

but let's say you love your jeep and you don't want to sell it. Now you take out a 4 or 5 year loan on $30k. Lot cheaper than a loan on $45k. Maybe even cheaper than your lease payment. Not good financially because you are continuing to pay interest on a depreciating asset. But as a payment buyer it is pretty nice to get to the end of your lease and your payment goes down.
 

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Yes. But to get that $10k you have to monetize your jeep. If you keep it then it will continue to depreciate and you won't get the $10k out. That is the catch.

but let's say you love your jeep and you don't want to sell it. Now you take out a 4 or 5 year loan on $30k. Lot cheaper than a loan on $45k. Maybe even cheaper than your lease payment. Not good financially because you are continuing to pay interest on a depreciating asset. But as a payment buyer it is pretty nice to get to the end of your lease and your payment goes down.
Damn it, I finally, finally get it now. Gotta sell it to get that 10k back. Sorry I'm dyslexic so it takes me a while.
 
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It's ok. I think this is why people are afraid of leasing. It is complicated and they are always told they are a bad person if they do it. But if you begin to understand it you can make better choices.

I am a sourcing director at an insurance company and we lease millions of dollars of equipment a year. Do you think our CFO is an idiot? No! He knows what he is doing and we lease where it makes sense because we understand how it works and what the trade offs are and we are disciplined about it.
 

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It's ok. I think this is why people are afraid of leasing. It is complicated and they are always told they are a bad person if they do it. But if you begin to understand it you can make better choices.

I am a sourcing director at an insurance company and we lease millions of dollars of equipment a year. Do you think our CFO is an idiot? No! He knows what he is doing and we lease where it makes sense because we understand how it works and what the trade offs are and we are disciplined about it.
I see why now. I had to research from the moment we started speaking until now (2.5 hours) to finally understand how all this works, even the whole leasing company money factor math.
 

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It's ok. I think this is why people are afraid of leasing. It is complicated and they are always told they are a bad person if they do it. But if you begin to understand it you can make better choices.

I am a sourcing director at an insurance company and we lease millions of dollars of equipment a year. Do you think our CFO is an idiot? No! He knows what he is doing and we lease where it makes sense because we understand how it works and what the trade offs are and we are disciplined about it.
leasing for business purposes is different than leasing for a mostly luxury item. I get your point, I am just saying...
 
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I disagree.

When you boil it right down in business we are asking ourselves one question - "Is this an asset that is worth owning or is this something consumable that I should expense?" It is the same question with a car lease.

You are implying a different question which is "Do you really need this fancy thing, or could you get by with a less expensive item that would meet your minimal needs?" We ask that question too. but it is a separate question.

But the rhetoric around leasing really bothers me. It goes something like this - "You are selling out your future so you can have a luxury item that you cannot really afford now. What about your retirement? What about your kids' education? Hmm? What about that you selfish bastard?"

The reality is, the fundamentals are the same whether it is a luxury item or not. What the rhetoric does is judgement - Is the lessor rationalizing this luxury item that they cannot really afford by making the payment something that they can justify?

In the other thread I said a car is not a financial instrument. It is also not, in my opinion, a commodity. if it were, there would only be about 5 cars. Why do you need a Mercedes Benz when you can buy a Hyundai? You don't. But that is ok. A family is not a commodity. A vacation is not a commodity. They do cost money that is not strictly correlated with their utility. But you have to spend your money on something. Why make people feel bad for spending it on a car they love? The point is to make good choices and get good value for the money you spend, not to only spend money on what you need.

Look leases have trade-offs and honestly there are more situations where a loan makes more sense than a lease. But we need to stop judging the lessors.
 

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You mentioned several questions I thought were worth asking about:

Why is the lease payment less on a 4-door sport and than a 2-door sport?
Why does it sometimes make sense to add options to your Wrangler to get the payment lower?
Should I put money down on my lease?

Can I order a JLU directly but lease it instead of loan? Is there a pre-approval process? How would you calculate the payment without pricing?
What type of preparation will I need to do before I walk into a dealership?

+1 NC Native
 
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You mentioned several questions I thought were worth asking about:

Why is the lease payment less on a 4-door sport and than a 2-door sport?
Why does it sometimes make sense to add options to your Wrangler to get the payment lower?
Should I put money down on my lease?

Can I order a JLU directly but lease it instead of loan? Is there a pre-approval process? How would you calculate the payment without pricing?

+1 NC Native
I will take them in order:

Why is the lease payment less on a 4-door sport and than a 2-door sport?

TLDR: Because the residual % (resale value) is higher on a 4-door than a 2-door

Go to the Jeep.com website and start with a standard 2-door or 4-door JK. Look at the top right where it has a fictitious lease price.

Here is the stripped sport:

2-door - $252/month
4-door - $216/month

Notice that the 4-door is cheaper. How can this be? It is because of residual value. Residual value is higher %-wiseon a 4-door. From a simplistic perspective, the residual value on a lease is "the part of the cost I don't have to pay." The more you don't have to pay percentage-wise, the less you actually pay. And on a JK that difference is enough to may the payment on the 4-door lower.

So how much different is the residual value? This forum is a good place for that kind of information:

https://forums.edmunds.com/discussion/48521/jeep/wrangler/2018-jeep-wrangler-lease-deals-and-prices

For example, a 2-door Willys residual is 63%. 4-door is 73%

Why does it sometimes make sense to add options to your Wrangler to get the payment lower?

TLDR: If the difference between sales price and residual shrinks you get a lower payment. Usually people do this by lowering the sales price but you can do it by raising the residual - either by picking a model with better resale, or by getting more expensive options but negotiating a more favorable (though not necessarily lower than the less optioned vehicle) selling price.

I did an example of this on another thread. I have had more success with this on other models where they discount much more off of their higher packages. I was able to lower my payment on a Tahoe by choosing a more expensive vehicle.

As we said before the higher the residual the lower the payment. If you had 2 cars at the same selling price but one had a higher residual than the other, your payment would be lower because you pay the difference between the selling price and the residual cost. The residual is a % of MSRP, not of the selling price. So while on a loan you don't care what the MSRP is you just want the lowest selling price, on a lease you want the smallest difference between the selling price and the residual cost.

So for example, Rubicon's have a high residual value. Sahara's are still good but much lower. A similarly priced (even higher priced) Rubicon will have a lower lease payment than a Sahara! Your selling price could even be higher and the payment lower (see the 2-door/4-door above). Or you could add on packages to the Rubicon and actually get a lower lease payment even if the selling price was higher than the less-equipped Rubicon.

Should I put money down on my lease?

TLDR: Conventional wisdom is no because it generally has minimal effect on the overall cost of the lease while exposing you to the risk that you may lose equity on the vehicle if it is totaled. For a Jeep, it is less risky because they depreciate slowly and the money factors are relatively high and they are relatively expensive so the financial benefits of a down payment are more pronounced and the lost equity is mitigated by the higher market values. Also the chances of totaling your car are low. So do the math. You may find that it makes sense to save money on the cost of the lease, lower your payment, and potentially get a tax benefit on a trade-in, against the like 3% possibility you may lose out on some of your equity.

Conventional wisdom is no. Something about losing your equity in the case your car is totaled when it doesn't make that much of a difference in the total cost.

But if you compare your total outlay with the down payment and without, it is a little more favorable with the down payment. And if you have a big one (such as a trade), the difference can be worth thinking about.

If your car is totaled the insurance company will give you the market value of the car. First they pay the residual and all your remaining payments before giving any remaining money back to you.

So if you make a down payment you have smaller payments with less interest in them. In the case of a totaled car this works in your favor. First because unlike a loan the leasing company gets to take all the remaining payments. In a loan they generally just get the principal. Smaller payments means a) less money for the leasing company and b) less interest that they get in the payments. That means more money back to you.

A simple example with made up numbers.

Let's say you have a car like this:

MSRP: $25,000
current market value: $15,000
cash paid already: $15,000
remaining payments: $5,000
residual: $5,000

Now you total it.

The leasing company gets $10,000 - the $5,000 for the residual and the $5,000 for the payments and you only get $5,000 cash. You have paid $10,000 more than the car is worth. Bummer.

If you hadn't made that big down payment you may not have lost so much money. But the remaining payments would have been bigger so the insurance company would have taken more of the $15,000 and left less for you. Does it really matter that much? You would have to do the specific math to figure that out.

And why is the conventional wisdom on a lease different than a loan? On a loan they say pay that thing down as fast as you can! Have equity in your car! But then it gets totaled and insurance only pays off the market value which has dropped like a rock for most cars. But somehow that is the smarter financial move. On a lease the same is true - but you are more likely to get the payment back than on a loan! Because on the loan the payments are higher, there is more interest, and you are building equity faster which can evaporate when the car is totaled.

And finally let's face it. Most of us are trying to put a car payment into the budget and sometimes we are more comfortable paying money one time and getting that payment lower payment, especially if it is a trade that has tax advantages. It is a calculated risk.

And let's calculate that risk. Based on a little googling most people wreck their car once in the first 19 years of their driving life and a disproportionate amount of those wrecks are in the first 2 years. And most of those wrecks probably don't result in a totaled car. So the chances of you totaling that Jeep in that 39 month period have got to be less than 5%. Since when do we make financial decisions on the basis of a 5% probability?

The best option is factory cash or other incentives because you are lowering your payment without putting real money at risk. Google "Jeep Golden Ticket".

So like all of this do the math and make an informed decision. I am going to do another post on this with a detailed example at some point.

Can I order a JLU directly but lease it instead of loan? Is there a pre-approval process? How would you calculate the payment without pricing?

TLDR: Yes. The financing transaction is separate from the purchase just like a loan is. If you can estimate pricing you can calculate a payment and if it changes when the car comes in you can walk away.

When you buy a car there are usually 2 separate transactions. There is buying the car and then there is financing the purchase. For some people they pay cash and avoid the second one but with cars so expensive that is less common. And lots of people finance with their bank or credit union. Still 2 transactions but 1 with the bank and 1 with the dealer.

But often the dealer can give you a better deal on a loan and they are the only ones these days who will do a lease. So a lot of the time you are sitting down with the dealer to do both transactions. On a lease, they tend to focus on the payment and try to do them both together as one transaction. You pick out a car, you agree on a payment, you sign the papers, and off you go. I recommend you treat it the same way as a loan. Treat it as 2 separate deals. Pick out a car and agree on a price. Then do a separate deal for the financing. That is true of both a loan and a lease.

And because it is a separate transaction (heck, they usually bring in their "finance guy" to do the second transaction), it can apply to a car you order as well as a car you pick off a lot.

I highly recommend you get an auto lease calculator app for your phone. Play with it to see how it works. When your dealer gives you the lease deal plug in the numbers to see how it works. Yes you need an estimated MSRP and sale price but then as the pricing firms up you can plug in the final numbers.

You can't necessarily close the financing when you do the order because it can take 45-60 days to get your car. But you can agree to terms and let them know that if the final financing is not in line with what you agreed on you will walk away. That can be frustrating because you just waited 1-2 months for your new car and sometimes people give in but you have the right to walk away.

The reality is most dealers (the one on this site being an exception) only lease through the manufacturers finance company. They have fixed residuals for the different models and only a 2-3 tiers of money factors. On Wranglers there are almost no factory incentives so that's not really a variable. A dealer should be able to give you a pretty good lease quote with nothing more than your FICO score. Then when the car comes in they can do the hard check on the credit, pull in the finance guy, and you can do the financing transaction.

Disclaimer here - I have worked on a deal like this before but never went through with it. In one case I ended up buying off the lot and in the other case I got cold feet and walked away from the deal.

What type of preparation will I need to do before I walk into a dealership?

Use the resources above - the Edmunds site, KBB to set expectations on MSRP versus invoice price, look into Tread Lightly to set the highest price you could pay at 1% below invoice, download a lease calculator app on your phone and run through scenarios using these numbers.

I don't know what the site rules are, so since you are in NC send me a private message and I can give you some dealer info.
 
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Good info!

Also, just to mention -- PenFed has a balloon payment option which I have used on past vehicles that retain value (i.e., Porsche GT cars). Could make sense here as well. You end up with a lower lease-like payment, maintain equity in the vehicle, and at the end of the term (i.e., 36 months), can pay the balloon in full or refinance it. Money is cheap, take advantage. Also, can be beneficial in certain states with weird lease tax rules.
 
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Good info!

Also, just to mention -- PenFed has a balloon payment option which I have used on past vehicles that retain value (i.e., Porsche GT cars). Could make sense here as well. You end up with a lower lease-like payment, maintain equity in the vehicle, and at the end of the term (i.e., 36 months), can pay the balloon in full or refinance it. Money is cheap, take advantage. Also, can be beneficial in certain states with weird lease tax rules.
Thanks for bringing this up. I can see some potential pros/cons relative to leasing. I will do the analysis at some point and post my findings.
 

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