Caddy Advisor's Comprehensive Leasing Guide

No matter where you stand on leases, we can all agree it generates a lot of confusion and debate. Financial gurus like Dave Ramsey say that leasing is fleecing, whereas others swear by leasing, arguing that it's far easier and more cost effective. The truth? It's always somewhere in the middle.

Here's the thing. Yes, I do sell cars for a living, and I have recommended a lease to plenty of customers. And no, I do not believe that a lease works in every situation; no, I'm not trying to fleece my customers; yes, I leased my last car. I never want you to get into a bad situation (and if you won't believe me for any other other reason) because I'd like for you to want to and be able to buy from me again and again.

If I'm about to lose your attention, the TLDR version is that you should almost always lease a new vehicle and finance a certified pre owned vehicle.

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Before we dive in further, I need to make sure we are all on the same page. So I'm going to go over some common terms you should know when you're considering a lease.

• Cap Cost Reduction = Fancy name for down payment

• Closed End Lease = Most vehicles are leased this way. You're paying down to a fixed number. If the vehicle is worth more, you can still buy it for the GPP. If the vehicle is worth less, you can give it back to the bank and the bank eats the negative equity.

• GAP Insurance = Stands for Guaranteed Asset Protection. It pays off the difference between what you owe on the loan to what the insurance company pays out according to market value in the event of a total loss. In most states it's included in the lease payment already without you having to purchase a separate policy.

• GPP = Guaranteed purchase price. Also known as residual value.

• Lease Loyalty/Conquest = Sometimes you may qualify for an incentive (discount on the car) if you're currently leasing a Cadillac or another competing luxury brand

• MF = Money Factor; basically the interest rate on the lease. Multiply by 2400 to get the rough APR equivalent. (0.0018 x 2400 = 4.32% APR)

• Mileage = How many miles you're needing per year. *15K is standard, 12k is low, 10k is ultra low. (Highest possible I've seen is 25K and lowest in select regions is 7.5K.)

• Open End Lease = Lessee is responsible for covering the difference between fair market value and what the vehicle has been paid down to in a balloon payment. My dealership doesn't offer this type of financing, and this is part of why leasing got a bad reputation in the past.

• Pull-ahead Offer = The bank will offer to pay off your remaining lease payments up to a certain amount so that you can get into a new vehicle early.

• Residual Value = What the vehicle is estimated to be worth at the end of the lease term

• Term = How long you're planning to lease. I've seen 24, 27, 36, 39, and 48 month for Cadillac. Sweet spot is usually 36 or 39 months, although 48 generally yields lowest payments.

*can vary by manufacturer

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Arguments FOR Leasing

1. With lease terms being 3 to 4 years, you'll be ready for a new car as soon as there are major updates. Let's look at some examples from Cadillac lineup. The fourth generation Escalade spans from 2015 to 2020, and it received its last major updates in 2018. A brand new Escalade is around the corner for 2021. The XT5 was released in 2017 and received a mid cycle refresh for 2020. The CT6 came out in 2016 and received a facelift in 2019. See a pattern here?

2. Nowadays, 72 month loans are the norm but I've had customers opt for an 84 month term. With really good credit you're looking at 3-5% from most lenders, but with some credit issues you might be looking at 10%+ interest rates. It doesn't take too much math to figure that initially the vehicle will be worth a LOT less than what you owe on it as you're busy paying beaucoup interest in the beginning. There's standard, non-promotional lease programs than can get you less than 1% interest, and you can still buy out the car at any time if you love it.

3. On top of that, you have to pay sales tax on the entire price of the car if you opt to purchase it. Figuring Utah tax rates, you'd be paying about 6 grand in taxes alone on a well equipped Escalade (90,000 x 0.0685 = 6165). If you don't put money down, you're essentially paying interest on tax. Ouch. On a lease, you only pay tax on each payment, so you pay less tax overall. Much better.

4. At the end of the lease, a. you don't have to worry about negative equity; b. you don't have to haggle for the trade in value; c. you might get special incentives for having leased your last car. In other words, there's actually a lot less to worry about when you're getting a new car.

5. In a close end lease, the bank always eats the negative equity. No matter how much you baby your car, there are things that can happen in the world that can obliterate the market value of your car. What if the car gets into a major crash but the repairs are just barely not enough to total it? Or gas prices shoot up through the roof again and nobody's looking for a big car? Or if there's some really negative press about the car and you couldn't pay someone to take it off your hands? It sounds drastic, but you know these examples have happened before.

6. On the other hand, if the residual is lower than the market value at the end, you can buy it out and the equity is all yours to keep.

7. Let's be super honest. We may have all the intention in the world to keep a car for 10 years and drive it for 200K miles. Reality is that life isn't so predictable and it's hard to say that your car will meet your needs 4 years down the road. Might you be married? Kids on the way? Different job? Moving to snow country? Or moving to a busy downtown?

Arguments AGAINST Leasing

1. If you're someone who puts A LOT of miles (like over 18K miles a year) I would probably steer you to a certified pre-owned vehicle. A Cadillac CPO will give you a balance of 6YR/100K mile warranty, with the clock starting from when the vehicle was put into service. (This means vehicles that have been traded in a year with 12K miles on it would have almost 5 years and 88K miles of warranty left.)

2. Sometimes the lease program for a specific car that month might not be all that appealing, so much so that you should consider a different model or financing the car instead. It could be that the bank has set a high MF, low residual, no incentives, or a combination of some or all of these. It usually doesn't happen for Cadillac, but the outgoing XTS did not have attractive lease rates at the end.

3. If you enjoy personalizing and modifying your vehicle extensively, you should indeed purchase your vehicle. The bank will expect the car more or less same specifications as when it left the factory; this means you can swap out rims and put the original ones back on, but you shouldn't put on any lifts or performance modifications.

4. If you're trying to buy a car from the previous model year, or a used car, there are other banks that may allow you to lease. It will be extremely rare that such lease will make sense because of low residuals.

Common Misconceptions

To break it up a bit, I'm going to present this section as a Q&A instead of a list. It's representative of conversations I've had in my head and with my customers in real life.

Q: I prefer to own my car, so I never lease. How long can I finance this car then?

A: Well, leasing is another way of financing the vehicle. You don't own your car until the car is fully paid off and you have the TITLE in hand. Until then, whether it's leased or financed, the bank owns this car. Since you can buy out the car at any time, and the fact that you're paying it down to the residual, it's essentially another way of financing.

Q: But I think I drive too many miles. What if I end up going over miles? Won't I pay a hefty penalty?

A: If you look at the odometer on your current car, chances are, your driving habits are quite average. For Cadillac, the standard over-mileage charge is 20 cents a mile currently. The best way to mitigate penalties is to get the miles you need in the beginning. There may be offers available to help you out or it may even make sense to buy out your vehicle at the end. I've seen some people start out with a lease (knowing they'll probably go over miles) with a clear intent to buy it out in the end.

Q: But I don't want to have car payments forever. Can't I just pay cash?

A: Actually, you can, even with a lease! With a one-pay lease, you would pay for the entire lease term up front, enjoy a lower interest rate, and have no payments for the duration of the lease.

Q: New cars are so overpriced/expensive. Wouldn't it be sensible just to buy a used car at a nice low price?

A: So let's say (for easy math), you can pay 600 a month on a new lease and 400 a month if you financed a used car. Let's say both cars suffer a major electronic issue that costs 2400 to fix. But wait! The new car is fully under warranty, whereas it'll all be on you on the used car. It's then that you realize you could have been driving a brand new car with the peace of mind of a full factory warranty - instead of a 5+ year old car that you're not sure what could go wrong next. And as the car ages, repairs only become more likely and more expensive. We all have to pay something to keep a car running.

How to get the BEST Lease Deal

So we're gonna take the many parts of a lease and examine each part to understand how to get the best lease deal. To get a better term, you're looking to minimize the difference between the selling price in the beginning (lower the better) and the residual value at the end (higher the better).

1. Money Factor. Make sure you know your credit and work towards getting it to 700+ for the best rates if it's sitting lower than that currently. The jump between regular lease and a subprime is not insignificant.

2. Find out if you qualify for any special incentives or discount programs. If you're an educator, military, police, or affiliated with GM in some way, you may qualify for a supplier discount. This reduces the selling price.

3. Opt for a "demo" unit, if available. They might have 3-4k miles once they're retired from the courtesy transportation program, but the extra incentives reduces the selling price further.

4. Consider a crossover or a truck. With their surging popularity, these two classes of vehicles tend to hold their value better, allowing for higher residual values. Contrarily, sedans tend to not lease as well because of lower residuals.

5. If you're looking for the lowest payment, consider taking the vehicle for 48 months. Even if you need to drive 12k miles a year, you'll still be within warranty the whole time, and you get to spread out the lease cost over a longer term.

6. Features wise, just get what you need and no more. If semi-aniline leather and nicer wheels really don't do anything for you, then skip the extra cost of the platinum package. If you don't need 12K miles because you barely drive, then opt for the 10K option.

7. It never hurts to ask. There really isn't much margin in the car business, but as a volume based dealer, it's more important to move a unit than sell any one vehicle at a big profit. If you can give a commitment around a reasonable number, the dealer will figure out a solution with you.

Most importantly, you can use this rule to measure whether it's actually good lease deal or not: Is your monthly payment is around 1% of the MSRP? If a $58K car shows a 610 payment including tax and initial costs, that would be pretty decent. And if it's below that? Now that is one fantastic lease deal.

Conclusion

I hope this article was helpful to you and you're walking away with a better understanding of how a lease can be beneficial. I think the biggest barrier for many people is not understanding the ins and outs of leasing and the fear that comes with that.

If you still have questions or if you're ready to lease a new Cadillac, please don't hesitate to reach me on any of my social media or give me a call at 801-952-5794.