Updated on July 12, 2023: This post was originally published in 2008 and has been revamped for accuracy, comprehensiveness, and relevancy.
Welcome to the complex world of car leasing. You may think of it as a simple process based on those enticing ads, but the reality is a web of contract terms, financial language, and meticulous details. However, armed with the right knowledge, you can turn this intricate process into a rewarding experience.
Lease agreements vary substantially among companies, so it’s crucial to understand the terms and shop around for the best deal. Always read the fine print to avoid unpleasant surprises down the line.
Leasing a car can seem daunting with its myriad details. But don’t worry! I’ve prepared this comprehensive guide to help you navigate the labyrinth of car leasing and drive out the other side with a triumphant smile.
1. What exactly does leasing a car entail?
In simple terms, a lease is a long-term rental agreement. Leasing could be an ideal option if you enjoy switching to a new car every few years or if you’d rather not bear the burden of a car’s depreciation. However, if you’re a high-mileage or rough driver, or if you like to drive your cars until they retire, leasing might not be as straightforward as it seems.
2. Is leasing a car cheaper or more beneficial than buying?
Vehicle Leasing can be a strategic move if you prefer to change your car every 2 to 3 years. It can reduce your car payments, or even allow you to drive a pricier car for a payment similar to that of a less expensive car. However, keep in mind the mileage caps and the decision you’ll need to make about purchasing a new car once your lease concludes. Also, leasing typically requires a good to excellent credit score.
3. What key leasing jargon should I know?
MSRP: The Manufacturer’s Suggested Retail Price (MSRP) is set by the car company, and should be displayed in a new car’s window. However, there might be additional charges that differ from dealer to dealer.
Capitalized cost: This is essentially the price of the vehicle. Regardless of whether you’re leasing or buying the car, negotiating the capitalized cost is crucial as a lower cost will result in lower monthly payments.
Money factor: Also known as the lease factor, the lower this number, the better for you. Multiply it by 2,400 to get an estimate of the interest rate. Dealers might be hesitant to reveal the money factor, so don’t shy away from asking.
Residual value: This is the car’s estimated value at the end of the lease. A higher residual value lowers your monthly payments, but it can also complicate the process of selling the lease, trading your vehicle mid-lease, or buying the vehicle at the end of the lease.
Lease rating / Depreciation rating: Lease ratings indicate which cars hold their value better and thus provide a more advantageous lease deal. It’s wise to avoid cars that depreciate quickly unless you’re willing and able to pay more.
4. What upfront payments are required at the start of a lease?
- Your first monthly payment
- A security deposit or your final monthly payment
- An additional down payment
- Fees for the vehicle’s licensing and registration
- Freight and destination charges
- Processing fees
5. What type of lease am I signing?
Ensure you’re signing a closed-end lease. In such a lease, the leasing company absorbs the cost if the car is worth less at the end of your lease than what was estimated during the signing. Always read the fine print and ensure you understand all the terms.
6. What are mileage caps and what should I know about them?
Since a car’s mileage influences its resale value, leases typically come with an annual mileage limit, usually between 10,000 to 15,000 miles. Ask about the mileage limit and the cost-per-mile penalty for exceeding the limit. If the limit is too low, you can usually negotiate a higher limit, but this will increase the cost of the lease.
7. What’s the duration of the warranty and what does it cover?
If you lease for the duration of the manufacturer’s warranty, you’ll avoid paying for major repairs. Ensure the manufacturer’s warranty covers the entire lease term and the number of miles you’re likely to drive.
8. What charges apply for wear and tear?
While you may consider a ding in the door or coffee stains on the upholstery as normal wear and tear, the dealer might see it as significant damage. Understand what the lease agreement defines as normal wear and tear before you sign.
9. What maintenance expenses are my responsibility?
During the contract period, you are typically responsible for the costs of maintaining the vehicle, just like you would if you owned it. This includes expenses such as insurance, oil changes, brakes and tires maintenance, regular upkeep, and all taxes assessed by your local government.
10. What are the terms for premature termination?
Prepare for the unexpected! Understand what happens if you need to terminate the lease early and ensure you can afford it. Early termination of a lease can be quite expensive.
11. Should I purchase any special insurance?
You will likely need gap insurance to cover the difference—potentially thousands of dollars—between what you owe on the lease and what the car is worth if it’s stolen or totaled in an accident. However, gap insurance only makes sense if you expect to be “upside down” on the car (you owe more than it is worth).
12. What payments might be due at the end of a lease?
You might be responsible for fees including excess mileage, damage, and more. Ensure you clarify all the potential end-of-lease fees with the dealer.
13. How can I negotiate a car lease effectively?
Before revealing your intention to lease, negotiate a reasonable purchase price for the car. If a dealer knows from the start that you plan to lease, they might use leasing terms to mask the actual sale price of the car. Comparing offers from different dealers on the same model can also be effective, as manufacturers usually offer the same lease program for each model.
Knowledge is your best weapon in these negotiations. The more you understand the process, key terms, and calculations, the more likely you are to secure a good deal. Don’t hesitate to take a calculator, notepad, and pen with you. Be confident and well-informed.
Dealers are legally required to provide lease cost information before you sign. To ensure you receive the right information, refer to this Federal Reserve page.
14. How can I buy a leased car at the end of the lease?
The end-of-lease purchase price, also known as “Residual Value,” typically exceeds the actual market value of a car by $3k-$4k. Knowledgeable shoppers recognize this and often return their leased cars to the leasing companies instead of buying them.
Remember, there’s also a non-negotiable “purchase option fee” of around $300-$400 hidden in your lease contract if you choose to buy the car at the end of the lease. My advice? Offer less than the market value for the car. Go into your negotiation well-prepared, and don’t hesitate to walk away if the terms don’t meet your expectations.
Disclaimer: This blog post provides general information and discussions about finance and related subjects. The opinions expressed here are the author’s alone and not those of his employer or any other individual or organization. The information and other content provided in this blog post, or in any linked materials, are not intended and should not be construed as financial advice, nor is the information a substitute for professional financial expertise or consultation. If you have financial concerns, you should consult with a financial advisor.