DGS49
Diamond Member
When you lease a car, the car is actually purchased by the leasing company (which might be a bank or even a corporate affiliate of the manufacturer), which usually holds the title to the vehicle, then it is rented to you for a the period of the lease. There are three basic variables in the transaction: the Acquisition Cost (what the leasing company pays for the car), the interest rate, and the Residual Value (the amount the leasing company believes it will get for the car, at wholesale, when you turn it in). Another term you should be familiar with is “Capital Cost Reduction,” which in the leasing world is a DOWN PAYMENT. It is your up-front money to lower the initial loan amount, pay up-front money to the dealer, and reduce your monthly payment. Usually, the up-front money is a combination of the first monthly payment, a CCR, and some relatively small fees. Sales/use taxes are not advertised, and are up to you to pay.
So as a member of the public, the “best” lease transaction combines a (a) low acquisition cost, (b) a low interest rate, and (c) a vehicle which depreciates as little as possible over the term of the lease, thus yielding a “high” residual value. Often the lowest acquisition cost comes when a manufacturer is discontinuing a model, or replacing it with something that is substantially re-designed. They want to clear out the old inventory to make way for the new. When comparing one lease with another, one might take into consideration a basic calculation that reveals “how good” a lease quote is. For purposes of illustration I will always use a 36 month lease, assuming 10,000 miles per year. The calculation goes like this: Start with the MSRP of the vehicle. Multiply the monthly payment by the number of months in the lease, then add the up-front money that is required to get that payment. This yields the aggregate total that you will have to pay during the term of the lease. There are other irritating little fees that you will be hit with, both when picking up the car and dropping it off, but unless you are really being screwed these should not total more than a thousand dollars in total. OK, once you have calculated the aggregate total of payments, divide that sum by the MSRP and it will give you a percentage. Usually, it’s about 50% of MSRP. That is, the lease will cost you half as much over three years as if you bought it outright; the tradeoff being, you have nothing but fond memories of your money at the end of three years. If the aggregate lease payments are less than 50% of MSRP, you have a pretty good deal; if it’s a lot less than that, it’s time to pounce on that vehicle. It makes more sense to lease than to buy at that point.
Well, it turns out that the “stars are aligned” these days on a lease of a Toyota Tacoma. The manufacturer is keen to move some iron and clear out inventories, bank interest rates are extremely low, and the Tacoma has one of the best resale values (least depreciation) of any vehicle sold in the U.S.
And don’t you know, Toyota is sponsoring Tacoma leases with the enticing “deal” of $2,999 down (which includes a Capital Cost Reduction of $2,080) and 36 payments of $269 per month, yielding an aggregate amount of $12,683 for the three-year lease, which is less than 35% of the $36,558 sticker price of the featured vehicle! The featured vehicle is basic, but still nicely equipped. It is an “SR5,” V-6, AWD, but it’s nothing fancy. Ugly steel wheels, cloth interior, and all that.
So here’s where it gets interesting. Essentially nobody wants the Tacoma that is featured in the ad. I would venture to say that very few dealers would even stock a vehicle like that. Well, knowing what we do about leasing, if we add items to the MSRP the Acquisition Cost will increase, but the Residual Value should increase proportionately with the increase in Acquisition Cost. In other words, if I lease a Tacoma with all the gee-gaws and a $42 thousand MSRP, the Residual Value should be proportionately higher than that of the stripped down Tacoma in the ad. So following the same calculation, if I were to lease a Tacoma Limited (MSRP $42,960), the aggregate total of the down payment and the monthly payments should be right around 35% of the Sticker Price - $14, 653. If you put the same $2,999 down, you come up with a higher monthly payment of $324 – an increase of a little more than 10% - in proportion with the increase in the MSRP.
But Toyota’s website does the calculation for you. If you lease the Tacoma Limited for the same 36 months, with the same $2,999 down payment, they come up with $433 per month ($3,083 due at signing). With THIS payment, the total of payments comes out to 43.5% of MSRP. Still a good deal, but nowhere near as good as the ad deal.
So what does that mean? It means that Toyota is initially offering to lease you a car that you don’t want, at a cost that leaves them and the dealer with almost no profit, in order to entice you to come in and lease a more expensive vehicle that is much more profitable FOR THEM. Bait & Switch?
But what if you don’t go all the way up to the Tacoma Limited? What if you pick through the options list and come up with a truck that is, say, $1,500 more than the “featured” Tacoma? The monthly payment quote will go up DRAMATICALLY. Because the dealer will assume that you don’t know anything about leases (the sales staff is as ignorant as you are) and will transform a transaction at cost (the ad) to a transaction that is wildly profitable for them. Last year I visited a VW dealer with a copy of a Tiguan lease ad FROM THAT DEALER. By the time I got the salesman to give be a hard number on an actual vehicle (which was the same as in the ad), the quote was a hundred dollars a month more than their own ad!
Bottom line: Be careful when talking about leases with a dealer. They are all thieves.
So as a member of the public, the “best” lease transaction combines a (a) low acquisition cost, (b) a low interest rate, and (c) a vehicle which depreciates as little as possible over the term of the lease, thus yielding a “high” residual value. Often the lowest acquisition cost comes when a manufacturer is discontinuing a model, or replacing it with something that is substantially re-designed. They want to clear out the old inventory to make way for the new. When comparing one lease with another, one might take into consideration a basic calculation that reveals “how good” a lease quote is. For purposes of illustration I will always use a 36 month lease, assuming 10,000 miles per year. The calculation goes like this: Start with the MSRP of the vehicle. Multiply the monthly payment by the number of months in the lease, then add the up-front money that is required to get that payment. This yields the aggregate total that you will have to pay during the term of the lease. There are other irritating little fees that you will be hit with, both when picking up the car and dropping it off, but unless you are really being screwed these should not total more than a thousand dollars in total. OK, once you have calculated the aggregate total of payments, divide that sum by the MSRP and it will give you a percentage. Usually, it’s about 50% of MSRP. That is, the lease will cost you half as much over three years as if you bought it outright; the tradeoff being, you have nothing but fond memories of your money at the end of three years. If the aggregate lease payments are less than 50% of MSRP, you have a pretty good deal; if it’s a lot less than that, it’s time to pounce on that vehicle. It makes more sense to lease than to buy at that point.
Well, it turns out that the “stars are aligned” these days on a lease of a Toyota Tacoma. The manufacturer is keen to move some iron and clear out inventories, bank interest rates are extremely low, and the Tacoma has one of the best resale values (least depreciation) of any vehicle sold in the U.S.
And don’t you know, Toyota is sponsoring Tacoma leases with the enticing “deal” of $2,999 down (which includes a Capital Cost Reduction of $2,080) and 36 payments of $269 per month, yielding an aggregate amount of $12,683 for the three-year lease, which is less than 35% of the $36,558 sticker price of the featured vehicle! The featured vehicle is basic, but still nicely equipped. It is an “SR5,” V-6, AWD, but it’s nothing fancy. Ugly steel wheels, cloth interior, and all that.
So here’s where it gets interesting. Essentially nobody wants the Tacoma that is featured in the ad. I would venture to say that very few dealers would even stock a vehicle like that. Well, knowing what we do about leasing, if we add items to the MSRP the Acquisition Cost will increase, but the Residual Value should increase proportionately with the increase in Acquisition Cost. In other words, if I lease a Tacoma with all the gee-gaws and a $42 thousand MSRP, the Residual Value should be proportionately higher than that of the stripped down Tacoma in the ad. So following the same calculation, if I were to lease a Tacoma Limited (MSRP $42,960), the aggregate total of the down payment and the monthly payments should be right around 35% of the Sticker Price - $14, 653. If you put the same $2,999 down, you come up with a higher monthly payment of $324 – an increase of a little more than 10% - in proportion with the increase in the MSRP.
But Toyota’s website does the calculation for you. If you lease the Tacoma Limited for the same 36 months, with the same $2,999 down payment, they come up with $433 per month ($3,083 due at signing). With THIS payment, the total of payments comes out to 43.5% of MSRP. Still a good deal, but nowhere near as good as the ad deal.
So what does that mean? It means that Toyota is initially offering to lease you a car that you don’t want, at a cost that leaves them and the dealer with almost no profit, in order to entice you to come in and lease a more expensive vehicle that is much more profitable FOR THEM. Bait & Switch?
But what if you don’t go all the way up to the Tacoma Limited? What if you pick through the options list and come up with a truck that is, say, $1,500 more than the “featured” Tacoma? The monthly payment quote will go up DRAMATICALLY. Because the dealer will assume that you don’t know anything about leases (the sales staff is as ignorant as you are) and will transform a transaction at cost (the ad) to a transaction that is wildly profitable for them. Last year I visited a VW dealer with a copy of a Tiguan lease ad FROM THAT DEALER. By the time I got the salesman to give be a hard number on an actual vehicle (which was the same as in the ad), the quote was a hundred dollars a month more than their own ad!
Bottom line: Be careful when talking about leases with a dealer. They are all thieves.
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