Everything You Need to Know About Leasing a Car

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If you are the type of person who likes to switch vehicles every few years, buying a new car is a terrible idea. The value of your automobile depreciates the moment you drive it off the lot, and continues to drop the longer you use it. Whenever you’re ready to upgrade, the trade-in value of your old vehicle likely won’t cover the cost of a new ride, which means you could end up paying far more than if you had leased from the beginning.

You may also be able to lease a nicer vehicle than you can afford to buy. Getting an auto loan typically requires a sizeable down payment, not to mention higher monthly expenses than you’ll owe with a lease. You’ll also have the option to switch to a newer model at the end of your contract. To upgrade a car you own, you’d have to either sell the old one, or trade it in to a dealer towards the purchase of a new one. If you no longer need your wheels, disposal with a lease is easy too. Simply return the car after your contract ends and you’re free to walk away.

Leasing a new car can even be advantageous over purchasing a used one. A newer machine is far less likely to break down or need repairs. Some lease agreements even cover basic maintenance, such as oil changes, which you will need to maintain the manufacturer’s warranty.

A new car with zero repair costs and low monthly payments might sound like a great deal. However, you should still do your research to avoid being taken for a ride. It’s easy when buying a car to know if you got a bargain. There’s a wealth of online resources to help you estimate the value of a car and compare interest rates on a loan.

Figuring out the true cost of a lease is more complicated. When you lease a car, you don’t own it. The lender is buying the car from the dealer and renting it to you. You pay the cost of depreciation over the period you have the vehicle for anywhere from six months to five years. The final cost will be the difference between the car’s price you negotiate and the residual value (estimated value of the car at the end of the lease) when you give it back, plus interest, taxes and fees. The higher the residual value (means the car holds its value better), the lower your payment will be. This explains why you can sometimes lease a more expensive car and get a lower monthly payment than you would have been able to get for a less expensive competitor. 

With a lease, you can negotiate the car’s purchase price, but you can’t change the residual value the lender uses to price your rental. Therefore, avoid letting the dealer know you plan to lease until after you have established the final bill so you can haggle it down as much as possible.

Interest rates on a lease are expressed a little differently than for a loan, if it appears on your contract at all. That’s because the lender isn’t required to disclose it. The money factor or lease fee is an estimate of your monthly interest payment and usually written as a decimal (e.g. .00275). You can multiply this figure by 2,400 to get your APR. Once calculated, your APR should be comparable to national new-car loan interest rates. Like interest on a loan, the lower the money factor, the lower your monthly lease payments, and the less you will pay in total finance charges. 

Unlike buying a car, a down payment may be optional, and is not recommended. If the car is stolen or totaled, GAP insurance will make sure that the lender gets the rest of their money. However, your down payment won’t get refunded. Putting more money down won’t affect your interest rate either. The money factor is based only on your credit. Your initial investment might lower your monthly payment slightly, but you would be risking a significant amount for very little gain.

While the down payment is optional, you can’t expect the dealer to just hand you a set of keys for free. There will be an acquisition fee to initiate the lease, though that can sometimes be rolled into your monthly payments. You’ll also be responsible for the same fees as if you bought the car, including title, license, and registration. In some states, you may be required to pay sales tax upfront, either on the full price of the vehicle or the capitalized cost of your lease. The cap cost is how much you are financing with your agreement, including the car’s negotiated price and any fees or taxes you haven’t paid.

Like flying on a budget airline, your ticket may be cheaper with a lease, but expect to get hit with fees for any extras. Lease agreements typically outline a maximum mileage you’re allowed to put on the vehicle, and will charge you a penalty for exceeding it. If you don’t buy the car after your lease is up, you may be charged a disposition fee. This compensates the lender for cleaning and reselling the car when you’re done with it. You may also be fined for excessive wear or damage when you turn it in.

Don’t be surprised if leasing a car seems more confusing than buying one. Most of the terminology comes from commercial equipment financing. Luckily, it doesn’t take an advanced accounting degree to learn the vocabulary and get a great deal on your next leased vehicle.