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Real world leases with all the fees attached. A free Excel spreadsheet that I wrote to calculate your monthly lease payments is also examined.

Are You Upside Down On Your Current Loan?
Many people email me to ask what to do if they are upside down, while shopping for  new car. I always tell them, don't buy a new car. Send in extra principal payments until you are no longer upside down, then sell the car. You slaughtered the cow, you have to eat it.

Real World Upside-down Loan Example
If you are upside down you're at a disadvantage, with little negotiating power. Here's a scenario that happens to many readers: You see an ad saying they'll pay off your current loan no matter how much you owe. If you trade in your $9000 car, the dealer might offer you $8000, which is the wholesale value of the car. They won't give you market value for it. If they do, you'll pay more for the car you are buying, or added extras.

Price of the car you want to buy	$14000
What You still owe on your Trade-in	$12000
Retail Value of your Trade-in	$9000
Wholesale Value of your trade-in (What the dealer will offer you)	$8000
What the dealer sells your trade-in for after buying it from you	$10000

If the dealer gives you $8000 (wholesale) for the trade-in, you still owe $4000 on it. The dealer pays off your balance of $12000 to the bank, now he owns your loan. Now you owe $4000 to the dealer, which is folded into the new loan or lease. So if you  buy a $14000 car, you are actually taking out a loan for $18000. The dealer makes you think he's giving you something for your old car, but you don't own the car, the bank does. In fact, you're getting nothing from the dealer, you just moved your loan balance to the new car. Not only did the dealer sell you a car at MSRP making probably $2000, he finances you for $18000, and sells your trade-in for maybe $10000, profiting $2000 on the trade-in as well. Now the dealer made $4000 profit, less overhead, plus interest kickbacks from the bank. That's why dealers love trade-ins. They cry on your shoulder how "little" they'll make on your trade-in. Then ask him why do they want it so bad? When you are upside on a loan, the dealer stands to reap huge rewards, as you are desperate to get out of the current loan. But you are not getting out, you still owe the money! This is worse on a lease because the dealer will make you pay the $4000 as a cap cost reduction, and will pad it by a few hundred dollars. So they may ask you to put down $4250 as a down payment. Heck, if you had $4250 in the first place, you would not be upside down on your loan.

Always look past the low monthly lease payment at the total picture. This means the closing costs such as down payment, first month, security deposit, dealer acquisition fee, bank fee, disposition fee, lease purchase option fee, etc. All these fees can add up to over $3000 that you need to drive out of there. The dealer will pull a Jedi mind trick on you and say

"But Jeff, these lease payments are much less than the monthly payments if you were to buy the car. We are saving you a lot of money."

And monkeys might fly out of my butt! Sure lease payments are less than loans, but it's the natural law of cash flow physics reducing your payments, the dealer has nothing to do with it. They work on your emotions, making you feel guilty for lowballing them when they are "already saving you money". But you would be saving EVEN MORE if they drop from MSRP. Lease payments are less than loan payments because 3 years worth of 54% depreciation on a lease is less than 4 or 5 years of 100% "payoff " on a loan. If you can get the dealer to drop the purchase price $2000 below MSRP, you'll save $50 per month depreciation, plus tax and finance charge. That's worth a every bit of effort. They'll say:

"Jeff, don't worry about the cap cost, we are selling the car to the leasing company. They'll lease it to you at this low monthly payment. Don't worry what they pay for the car, It does not affect you. You just pay this low monthly payment."

It does affect you, as depreciation is higher due to the fact that the selling price is higher. Remember, the dealer still profits on the lease by selling the car to the leasing company.

They keep quoting you monthly payments to condition you. Every time they give you a monthly payment, ask them the value of the entire deal. They may lower your monthly payments, making you think it's a good deal, but they just increase the cash down or the number of months in the loan term. Don't let them pull this clever trick on you!

Gratuitous Free Download! Auto Lease Monthly Payment Spreadsheet Because I like you folks so much, here's a free gift: I created an Excel spreadsheet to calculate your lease payments. I based it on the FTC's Regulation M Model Lease form with several enhancements. I highly suggest that you download it and get practice with it on an old lease, or some of the examples on this page. This spreadsheet will make your life so much easier. The enhancements I made are the inclusion of the money factor, lines for other closing costs like dealer acquisition, I colored the different sections to make it easier to use, and I even added fields to automatically calculate your excess mileage penalty based on your miles over the limit. This will be useful for a lease that is about to expire. The penalties are then added to the total cost of lease to show you how much the entire lease will cost you. This is what dealers never tell you. One other thing you'll like about the spreadsheet is all the fields are named. So instead of cryptic cell formulas, you can click on any total that I have on the spreadsheet, and it will tell you the names of all the items that make up the total. This will help you see how payments are calculated. The instructions are on the "Instructions" tab the spreadsheet bottom. You can do your calculations without being connected to the internet, and you can bring your notebook computer with you to the dealer and check their numbers right there. Even better than this spreadsheet though, is the Expert Lease Pro Software that has the ALG Lease Residual Values built right into it. Many plaintiff attorneys and state attorneys general use it to investigate crooked leasing practices. Many readers have used this spreadsheet right there in the finance office and caught dealers cheating. Right Click Image, choose "Save Target As" to Download spreadsheet

You'll notice in the spreadsheet I made no cell for you to enter MSRP. This is because you never want to see MSRP listed on the lease, because you want a negotiated cap cost that is less than MSRP. Never let the dealer even use an MSRP field on the buyer's worksheet. The only thing MSRP is used for is calculating the residual value. But the spreadsheet just allows you to enter the calculated residual value. Once you let the dealer write MSRP on the lease form, he has his foot in the door and can start playing around with the numbers and fields to charge you MSRP, even though you just spent an hour negotiating the cap cost down. The dealer might put MSRP on the form, saying he just uses it to calculate the residual, but don't let him. Tell them to calculate the residual value and enter it on the form instead.

Try ALL the discount car buying sites like InvoiceDealers, Cars.com, Yahoo!Autos, Autos.com, Edmunds.com, MyRide.com and CarsDirect. Once you've gotten a discount on the selling price, then you negotiate the terms of the lease.

Ford Leasing
Expert Lease Pro can calculate Ford leases, which are different from the industry norm due to their "hidden" money factors. Because Ford had to be different, my spreadsheet is off with Ford leases.

In states like Illinois, Texas, and a few others, they tax you according to the gross cap cost up front. This is very unfair because you are only using about 50% equity then returning the vehicle.

Finance charge is calculated by adding the cap cost to the residual value, then multiplying by money factor. They are not ripping you off, the money factor takes care of everything, and makes life easier. Assume you lease a Lexus SC300 for 36 months, with an adjusted cap cost of $35000. They give you a residual of 54% after 36 months ($18900). You can verify this too if you have the ALG Lease Residual Values. They disclose to you the money factor is .00333 (Equivalent to 8% APR).

1) Monthly Depreciation Fee = ( $35000 - $18900 ) ÷ 36 = $447.22
2) Monthly Finance Charge = ( $35000 + $18900 ) × .00333 = $179.49
3) Sales Tax = ($447.22 + $179.49) * .06  (Florida Tax is 6%) = $37.60

These three are then added up to arrive at your monthly payment:

Total Monthly Payment For Lexus = $447.22 + $179.49 + $37.60 = $664.31

These 36 payments will cost you  $23915. If you buy the car at its $18900 residual value, your total cost would be 23915+18900+ Up Front Fees = $42815 + up front fees. Up front fees are bank fee, dealer service fee, security, etc. Buying is cheaper in the long run. If you had bought the $35000 car with 8% APR over the same 3 years your monthly payments would be based on $37100 (6% Florida tax), ignoring luxury tax. Your monthly payment would be more at $1162.57, but your total loan cost is only $41852.84. This car had a small difference. I usually see a $3000-$6000 difference between buying and leasing.

Get paperwork from friends who have leased, use the spreadsheet to verify their numbers. When you check your numbers with the dealer's numbers your results should be within pennies. One dealer tried pulling a Jedi mind trick on my friend, who checked the numbers and saw they were $9.00 off per month, the dealer tried to pass it off on my friend's "error". He told him not to worry he was only "$9 off, no big deal". But it is a big deal, on a 48 month lease, that's $432 they are stealing from you. Whether you use tables or a calculator program, they should all be within pennies over the entire lease term. They all use the same formula, so don't let the dealer tell you that you calculated wrong. Bring leasing software along with you on a notebook PC and run his numbers right there. If you are ever doubtful about the dealer's numbers and they keep insisting that you are wrong, don't sign the deal! Go home and check the numbers again in a no pressure environment.

Real World Example #1
Here's one from a reader who emailed me to say how they got scammed on a Toyota Camry lease. Before going in, the buyer researched all the prices and calculated the numbers in the table below. The dealer also calculated the numbers and showed them a lower monthly payment. Good deal right? Wrong! Examine the costs in the table:

This is a textbook scam. Notice the items in RED? The salesman played cash flow games on the buyer, overcharging them. The monthly payments were less, so the salesman had the buyer's attention focused on the payments, instead of the big picture. The buyer had no idea the dealer charged him $400 over MSRP! Also, the dealer required $797 more cash down, which somewhat shields the $400 over invoice, Because the $797 reduces the cap cost even further. The buyer's loss is $617 on the Total Cost Of Lease in the table. But with higher cap cost, how are the payments lower? It's simple. They increased cash down to $4297, artificially inflated the residual value so the depreciation would be less, and used a slightly lower money factor to throw off the buyer, leaving our buyer with a $617 loss. Very clever, Mr. Bond. This higher residual is OK if he won't buy the car at lease end. But if he does, he'll lose even more money, because now the residual is $14012, and the market value of the car will most likely be $12,400. If the buyer  purchases this car at the end of the lease, they will lose a total of $2326 to this scam.

Use the spreadsheet  I provided above to check these numbers. This is the biggest reason I hate leases. The dealers have so many variables to play around with. If the dealer had just left MSRP alone, and not required the extra down payment, his deal would have been a good one, but he got greedy, and the buyer paid for it. Repetitious Moral of the story: Don't let them redirect your attention to just the monthly payment.

Real World Example #2
Here's a BMW 740i ad for a 30 month lease. At least they disclose what you need at inception: over $6490 to close. I admire their honesty. But this high down payment is used to reduce the cap cost, thus making you think your payments are low. Why would you want to put down so much cash on a car that you don't own? Apartment complexes don't make you pay $6490 to move in, or nobody would move in.

A high down payment is used to mask the true cost of the lease. They divert your attention to "low" monthly payments.

I filled out my Regulation M Model Lease spreadsheet for the BMW in the table below. Click the spreadsheet below to download it and view while you read the comments below.

The fine print in the BMW ad mentions the "sale price" of the car is MSRP, $61640. You want me pay full MSRP?! I surfed the net and found dealer invoice was only $54495! They also get a 2% holdback from the factory of $1232. This means the dealer only paid $54494-$1232 = $53263 for this car! The dealer's profit on this car will be $8377! Are you seeing red yet? During negotiations, the dealer cries on your shoulder that you're stealing food from his baby's mouth. You must be proactive, not reactive. Blame them if they can't afford to put food in their kid's mouths. Tell them they are stealing from your baby's mouth.

Also, the fine print says the payment excludes taxes, so add Florida 6% tax to $740. Now your real monthly payment is $784, not $740. The fine print says you are limited to 25000 miles during the 30 month lease, which is how they hide the 10,000 mile/year limit. Who in their right mind would want a lease with <12000 miles a year? Few people can drive less than 12000 miles/year. If you drive 12000 miles per year, you'll put on 30000 miles during these 30 months, and it will cost you 5000 * .15 = $750 at lease end. Also, you have to pay a  $250 termination fee when you turn in the car. These guys seem stingy so far, what do you think are the chances that you'll get your $750 security deposit back? They could find $850 worth of excess wear and tear when you turn the car in. And here's my favorite: Subject to credit approval. This means it's unlikely you'll enjoy this "$740" monthly payment, as they may inform you that you did not qualify for the "interest rate" that produces this low payment. If you're really unlucky, they can call you to inform you of this a week after you've leased the car, insisting that you bring in additional cash and bump up your monthly payment. This is legal if you signed something that stating you read and understood all the terms and conditions, and this lease is "subject to approval". Well sorry, you didn't get approval, this is your new rate....

Let's check their math by looking at the spreadsheet I filled out. It was pretty easy, I entered 30 into the Green "# of months" section. Next enter the $61,640 selling price in the "Negotiated selling price of the vehicle" line in the Green section. Next, go to the yellow section and add your $5000 cash down. Add The $750 security deposit below cash down in the yellow section. Next, go down to the blue section and enter the residual value of $41,299, as supplied by the ad. Go to the bottom yellow section and fill in the mileage info. Go to the pink section and add the $250 disposition fee. Now it's time to calculate the monthly payment. They did not supply us with the money factor, so let's work backwards. I entered a money factor of .003 in the blue section and checked out what the monthly payments were. They came out higher than the ad. So I slowly reduce the money factor until the payments match. I thus ended up at a money factor of .002335, or an equivalent 5.6% APR. A decent rate. This is the true beauty of the spreadsheet. You can keep playing with money factors until your lease payments match theirs. Now you can see everything jives with their numbers, including the monthly payment and the total of all the monthly payments in the brown section.

But look at the total cost of the lease in the orange section. Notice how it says $27000? That's how much the lease is costing you with the monthly payments, cash down, and fees, etc. The ad states the monthly payments add up to $22,200, but your brain tricks you into thinking that's how much the lease will cost you, which is wrong. Clever with their wording aren't they? The ad states that taxes and other fees are not included. Well that's a lot of money they are not telling us about so let's add the tax. I enter 6% Florida sales tax, and suddenly the payments jump up to $784, and the total cost of the lease is now over $29000. All leasing ads neglect to include tax in the quoted monthly payment to reel you in with low ball quotes. Now the total of your monthly payments is $23,500, not the $22,200 the ad states. Their "does not include taxes" clause allows them to lie to you about the real cost of the lease, and it's all legal. You won't find out how much it will cost you until you get there. But using my spreadsheet, you were able to figure it all out and you'll be ready to lease. But we aren't done yet, folks. You know there's going to be title fees, and registration fees. If you know these numbers for your state, just fill them in.

The $61640 from the ad is the gross cap cost. This is where you should negotiate down to near invoice, which is $54495. If you had done this, your monthly payments would have been about $260 less! The dealer still gets a $1232 holdback, not bad for a few hours work. They'll cry on your shoulder that they  paid over $55000 for the car. This is not true. They borrowed the money for the car at a low interest rate and are paying an average floor plan interest of about $150 per month for every car on the lot. If they had the car for 3 months, floor plan cost is $450. The dealer does not shell out $55000 to buy the car. Any smart business knows to leverage money. If I want to buy an investment condo for $100000 and I have $100000 in cash, I'm not going to buy it outright, I'm going to invest $20000 in 5 condos and leverage my cash flow by borrowing the rest. This is how the dealers do it also. So don't fall for their Jedi mind tricks. The salesman probably does not even know about this. By offering them the deal at invoice, they will still make 300% on their money. Ask him where else they could get such a return on their money. If you don't talk them down in price on this BMW, this means $260 out of every one of your monthly payments on this lease is paying for the dealer's luxury yacht. How's that for a sobering thought. He deserves to be rich, but not too rich.

This model form is a great tool, because the rest of the numbers are self explanatory from here. The $15341 depreciation calculated on the form is the basis for calculating your monthly payment. Here's another method to figure out how much interest they are charging us, to see if we're getting screwed. They did not reveal interest rates or money factor, so we'll have to figure it out on our own. No problem, man. Remember,

Monthly Payment = (Monthly Depreciation Fee + Monthly Finance Charge + Sales Tax),

where the

Monthly Depreciation Fee = ( Net Cap Cost - Residual ) ÷ Lease Term

This is then ($56640 - $41299) ÷ 30 = $511.37 Monthly depreciation fee.

Next,

Monthly Finance Charge = ( Net Cap Cost + Residual ) × Money Factor.
Since we don't know the money factor, we can calculate it and the finance charge by subtracting the monthly depreciation from the $740 monthly payment. Subtract $511.37 from the $740 monthly payment to get finance charge ($228.63), then solve for money factor. Money factor = $228.63 ÷($56640 + 41,299) = .002. Now the equivalent APR interest rate is .002 * 2400 = 5.6 % Not a bad rate. Of course, the spreadsheet uses more decimal places, so it worked out to be .002335.

See, not too complicated, just a few baby steps, that's all. Now, time for sales tax.

Sales Tax = $740 * 6% Florida tax = $44.40.

Now your actual monthly payment is $511.37 + $228.63 + $44.40 = $784.66.
You can check my math with a lease calculator. It's a tiny bit off from the spreadsheet due to the number of decimal places I used in the money factor, but you can see my spreadsheet does all the calculations for you.

This is a way for them to legally low ball your monthly payment. The fine print always says "monthly payment, excluding taxes".

How much would our total cost be if we were to buy this car at the end of the lease? $70382. If you instead applied the $6490 down payment toward buying the $61640 car instead, you also have tax of 6% * 61640= $3698.40, neglecting luxury tax. So the amount you are borrowing is  $61640 + $3698.40 - $6490 = $58848.40. At 5.6% APR, your monthly payments on the 30 month  loan would be $2106.68, and the total loan cost would be $63200.52 + $6490 = $69690. It's cheaper to buy the car. So you see, with a little effort, we were able to calculate how much interest they were quoting us. This 5.6% rate seems mighty optimistic for most people, especially when most lease money factors were equivalent to 8-10% APR in 10/97. Remember the ad says subject to credit approval. They can find a way to say:

"Sorry, Jeff, we could not get you approved at this rate. We could only get you approved at 18% APR."

If they quote you an APR of 10%, the money factor is 10/2400 = .004. This increases the interest (rent charge) part of your monthly payments by $179!! Now you are paying $964 a month. A far cry from their ad, and all legal due to the "approved credit" clause. These are issues to keep in mind when you have less than optimal credit.

You must make sure you are happy with the lease before you sign the papers. You can always think about it tonight and come back tomorrow. Make sure you have your ducks in a row before you sign so there won't be any buyer's remorse later. If you are unhappy with their math, take a few days to think about it, but do not sign unless you are 100% sure.

This is real, it can happen to you, and it does happen every day. These are some of the things to look out for. Why do you think nearly all dealer ads are leases? It's because of all these complicated number games and terms that they can play around with the numbers. They don't have all these confusing terms on in purchase loans. Heck, I even had to think quite a bit going through these numbers, it's not trivial, so study up! Many readers email us asking where to get residual values. This is an important weapon to have so you can verify the dealer's claims. Every dealer claims their car has the highest residual value in 36 months, and some are just downright lies, as some cars can lose 60% of their value in 36 months. But you'll know because you had the ALG Lease Residual Values.

Try ALL the discount car buying sites like InvoiceDealers, Cars.com, Yahoo!Autos, Autos.com, Edmunds.com, MyRide.com and CarsDirect. Once you've gotten a discount on the selling price, then you negotiate the terms of the lease.

Go To Part 4: Links To Internet Sites, Determining Dealer Cost.
Jump to any section. I suggest you read each chapter in order.
Part 1: Car Leasing Intro What leasing means, how it works, the advantages and disadvantages of leasing, and how to finance a lease.	Part 2: Leasing Glossary Glossary terms used in leasing, and how they are used against you so you'll be prepared for decisions in leasing your dream car.	Part 3: Lease Examples Real world leases with fees attached. A free Excel spreadsheet to calculate your monthly lease payments. How car dealers calculate lease payments.	Part 4: Web Sites To Use Reviews of discount car buying sites, determine how much dealers pay for cars, how to get ALG lease residual values. How to price your trade-in.
Part 5: Leasing Scams Federal leasing laws, and all the common car dealer leasing scams.	Part 6: Lease Dilemmas Money saving tips, getting out of common leasing dilemmas. What to do when your current lease is due.	ALG Residual Values Reviews of top leasing software and where to get ALG residual values. How to avoid lease payment scams.
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