Leasing 101

It seems that people usually have a lot of questions about leasing and/or don't know much about it.  Hopefully, this may clear some things up for them and help them understand it a little better and decide if it make sense for their situation or not.

The Basics

The residual value is the stated value at the end of the lease if you want to purchase it. Your payments are based on the difference of the selling price and the residual plus interest (expressed as a money factor, Scion's Tier 1+ (720+ score) is .00200, which is about 4.5-5%) and taxes. The "interest" is higher than if you financed it, but you are only paying it for a short term on part of the price of the vehicle. 

Toyota has different lease incentives on certain vehicles that will vary by region.  The region where I am at is called Central Atlantic Toyota.  It consists of PA, VA, WV, DE, MD and Washington D.C.  A 2012 Rav4 for example will have a Tier 1+ money factor of .00001, which is about 0.02%.  A money factor that low makes for some great lease deal on the vehicle.  You can lease a 2012 Rav4 4x4 (approx $25,000 MSRP) for $259 per month plus tax at 12k miles per year with about $800 out of pocket.

The advertised payments for leases are always plus tax because it varies by states and even counties. For example, Philadelphia & Pittsburgh counties have a 7% sales tax, whereas the rest of Pennsylvania has a 6% rate. Pennsylvania also has a 3% usage tax on leases, which may vary by state as well.

The minimum down payment required for a lease is your first payment and tags. Anything above that is considered a capitalized cost reduction, which is a fancy phrase for additional down payment. When you leave the dealership, you will have 35 payments left, assuming you did a 36 month lease. After you make your last payment, you have 30 days to decide what you are going to do and it needs to be turned in. 


  • Leasing is great if you want to get a lower payment for a shorter term 

  •  It's also good for someone that may need a different vehicle in the future and you don't have to get into a 5-6 year finance. 

  • It allows you to get a new car every 3 years and be covered under factory warranty the entire time. Also, with Toyota/Scion giving you two years of free maintenance, you only have a year of maintenance to pay for. 

  • Another advantage of a lease is all the options that you have at the end of a lease, which is discussed later.

  • Disadvantages

  • A disadvantage to leasing is that you are limited on the amount of miles that you can drive, but you can build more mileage into the lease to accommodate your driving habits. 

  • You may also have to carry higher limits of coverage through your car insurance than you would if you financed it. 

  • Over the long term, if you lease the car first, then buy it out at the end of the lease, you will pay more for it than if you financed it the first time. 

  • Your Options with a Lease

    Your first option at the end of the lease is to turn the car in to the bank at the end of the lease and walk away from it and start over by leasing another car or buying one. Believe it or not, this doesn't happen often at our dealership. We usually always trade them because we want them for Certified Pre-Owned cars on the lot.

    A second option is you can trade it in towards another vehicle. I'll use the Scion FRS residual for this example. Say at the end of three years, the vehicle is appraised at $17,500 and the residual (buy out) is $16,698. The $802 is YOUR money. The way it works is that the dealership trades the car and pays it off and that money is applied to your next deal. 

    The other scenario would be, say if the car is appraised at $15,000. The negative equity is not your problem, it's the banks. In this situation is when you would just turn the car in and walk away. This scenario usually occurs if someone drives more miles than what was allowed in the lease and the vehicle is worth less because of that. This is when excess wear and tear comes into play, which I will get into later.

    Another option with the end of the lease is to buy it out yourself at the end. You can either obtain the financing yourself or you can go into your local dealership and they can do the financing through Toyota or another bank they deal with. You will have to pay sales tax on the residual value because during your lease, you only pay sales tax on each payment, not the entire amount.

    Your last option at the end of a lease, at least with Toyota anyway, is to extend it. Toyota Financial Services will allow you to extend your lease as long as your payment history has been good with them. An extension comes in handy in a situation where you may not be in a position to buy or lease a new vehicle for whatever reason, or Toyota or Scion may be releasing a new model that isn't out yet that you want or had to order etc. Now if you want to extend your lease to go buy a new "Brand X" car, then tough luck, they want their car back or you to buy it.

    I Heard Leasing Was the Worst Thing You Can Do.

    Many of the horror stories that you may have heard about leasing is from the mid-90's when they were open-ended. What that means is the banks were "open" to do or charge whatever they wanted at the end of the lease and unfortunately, they took advantage of a lot of consumers. Leases now are closed-ended and that means that everything with the lease contract is agreed upon at the signing of the initial contract and nothing changes. There will be no surprises.

    Other "bad experiences" with leasing has to do with the customer driving way more miles than they anticipated, whether it was from a career change or whatever. They then got a hefty excess mileage bill at the end when they turned the car in.

    If the car is returned to the bank, here's where excess wear and tear and mileage come into play. Excess mileage charges are $0.15 per mile at the end and $0.10 if you build it in up front. You can build in 33,000 miles per year into a lease, but by doing so, reduces the residual value, which in turn, raises your payment. For every 10,000 miles you add into the total mileage, you should add roughly $30 to the payment and it would be figured into the initial contract. So say you max the mileage out on a lease, you should expect your payment to be roughly $180-$200 higher than a 12-15k per year lease. So you do lose a benefit of leasing by building in a lot of mileage. It is cheaper to build it in to the lease at the beginning, but keep in mind, if you don't use all the mileage, you do not get a refund. You may recapture some of the value in the vehicle being worth more at the end of the lease because it has lower mileage, but not all of what you paid in.

    Another thing you may hear about leases is that you are locked in for the whole term. WRONG! You can trade in or buy out a lease whenever you want. It's usually best to keep a lease at least half to two thirds of the lease term, so on a 36 month lease, 18-24 months. 

    Toyota's Definition of Excess Wear & Tear

    I hope this helps some of you that were/are considering a lease. If you have any questions, feel free to ask. If you have anything to add, let me know and I will edit this and update it.

    Full Disclosure: *I will be leasing my Scion FRS when it comes in.*


    The residual value on a FRS manual trans is $16,698 (12,000 miles per year) and MSRP is $24,930.  Your payments are based on the difference, plus tax, tags, interest, etc.

    Your monthly depreciation is ($24,930 + $650 acq fee - $16,698) / 36 mos = $246.72 depreciation

    The finance charges are based on the cap cost (sale price, less any trade or cap cost reduction which is down payment in excess of first payment and tags).  This example, I'm assuming $0 down, just responsible for start ups (1st payment & tags) due at signing.

    The math:

    $24,930 + $16,698 + $650 acquisition fee = $42,278

    $42,278 * .00200 (Tier 1+ money factor for lease) = $84.56 (monthly "Interest")

    This amount is the monthly "interest" to borrow the money to lease the car through Toyota Financial Services.  It is based on your credit score.  Here's a chart of what TFS's money factors are depending on your score.

    Zone 1+ Fico 720+   -----0.00200 up to 60 months  
    Zone 1 Fico 719-690 ----0.00210 up to 60 months  
    Zone 2 Fico 689-670 ----0.00255 up to 60 months  
    Zone 3 Fico 669-650 ----0.00345 up to 60 months  
    Zone 4 Fico 649-630 ----0.00410 up to 60 months  
    Zone 5 Fico 629-610 ----0.00490 up to 60 months
    Zone 6 Fico 609-580 ----0.00550 up to 60 months
    Zone 7 Fico 579-520 ----0.00670 up to 60 months

    Now, add the monthly depreciation and the monthly "interest" and you will have the base monthly payment before taxes.

    $246.72 + $84.56 = $331.28

    The taxes will vary by state/counties, etc, but since I'm in Pennsylvania, I'm going to use my home state for the example.  

    $331.28 * 9% (6% sales tax + 3% usage tax) = $29.82 tax on payment.

    Now add all three amounts together.  Depreciation + Interest + Tax = Lease payment

    $246.72 + $84.56 + $29.82 = $361.10 lease payment

    This payment is just with your 1st payment and tags due at signing, which at my dealership in PA would be $361.10 + $217.05  = $578.15.

    For each additional $1,000 down payment, you should subtract roughly $30 per month from the payment for a quick estimate.  This method will get you close....I'd say +/- $2-3 per month and if that variance is going to stop you from buying this car, then you probably shouldn't be buying it in the fist place...lol

    Some people may wonder why two different cars for the same price will have a completely different lease payment.  There are a few reasons which include incentives, options, accessories, and the residual percentage.  If a vehicle has a lot of options on it that are listed as options on the window sticker, it won't lease as well because those options are not residualized.  Residualized means that they are factored in when calculating what the residual value is at the end of the lease.  The higher the residual, the lower the monthly payment.  Residual values are calculated on the BASE MSRP of the vehicle.  Many banks got themselves in trouble in the 1990's with leasing when they were residualizing everything like gold emblems, mudguards, etc when these items had little effect on the value of the vehicle at the end of the lease.  When the banks got the cars back and sent them to auction, they ended up taking a beating when the amount they sold for at auction was no where near what they owned them for.  This is the reason why the only real players in the leasing business are the financial arms of the auto manufacturers like Toyota Financial, Honda Financial, etc.  

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