To many people, leasing an automobile is a popular idea because it offers a way to drive the vehicles they want — new vehicles without significant history or "baggage" — for a smaller monthly payment and often less money down (required to allow for smaller monthly payments). However, it's important to understand the key concepts, options and information about leasing to make certain that leasing a car or truck is the right decision for your automobile purchase.
At the highest level, leasing is simply a method of paying for the use of a vehicle over a specified period of time. Think of it like renting your car for an extended period of time. This article is designed to walk the person who is new to leasing through 32 important factors related to leasing a car or truck. In addition, you will find links to resources and information related to the subject of leasing a vehicle.
Negotiate Your Price
Contrary to what you may hear at the dealership, the price of the car or truck is what will determine the lease payments, but just because it's a lease, does not mean that there is no opportunity to negotiate vehicle purchase price. This is critical to establishing the best payment options for your lease.
Know what you want and what it traditionally will cost
Know the features and vehicle amenities that you want up front and understand what the traditional invoice price is for your new vehicle. Here are resources for finding out traditional new car prices and what may be fair when negotiating.
Resources for pricing vehicles:
Determining whether leasing or buying is more advantageous for your situation
Key Issues and thoughts to consider:
- What are you priorities in vehicle ownership?
- Do you need to have a new vehicle on an ongoing basis?
- Would you tend to drive a vehicle for a longer duration of time after it is purchased?
Lease Versus Buy Resources and Articles
The dealership is not your leasing company
Although most automobile manufacturers will have financial subsidiaries, you are not making financial arrangements with the dealer - they are simply facilitating the transaction. As such, you have the opportunity to select your own leasing arrangements if desired.
Lease Payments are primarily calculated by the vehicle's depreciation
This means that the payments you make on your leasing contract are traditionally calculated by factoring the residual value of the car after you are finished "using it". So, if a car is worth $25,000 new and will be worth $20,000 2 years from now, the basic payment structure is derived from the $5,000 in lost value when the car is returned (the depreciation).
Lease Payment Calculators
Make certain to understand the calculation of your monthly payment
Monthly payments are calculated using the depreciation value, money rate and taxes. Often times you will not see the calculation of the lease payment until it is complete, so you should be aware of what these payments should be. If you are not, how will you know if the price you agreed upon is what is being factored, or if there are hidden fees or charges?
- Always check the dealer's monthly payment figures against your own figures
Understand that there are financing charges that are also associated with the lease payment
Fees are usually tied to an interest rate which is based on how much money the leasing company needs to make for letting you "borrow" money to drive the car. In essence, the financing company borrowed money to set your lease up, so you pay them a financing charge to cover that (and probably a bit more).
- Make certain to understand if there are any additional fees associated with the contract
Often times you will have to come up with a security deposit for your lease. In addition, remember that you make your payments ahead, not at the end of each month. Your first payment is usually due at signing, covering your first month of use of your car or truck.
- Leasing rates should be comparable to financing rates for purchasing
Make certain to ask what your rates will be, because these rates are not required to be disclosed, as they are for traditional financing arrangements.
- Credit does matter
The better your credit, the lower your leasing rates will be. It's the same idea as when you apply for any credit or financing situation.
- Don't agree to extended warranties, credit insurance, or add-on services
It's up to you whether you choose these types of items or not, but make those determinations after negotiating the price.
Two Types of Leases: Closed End and Open End
Make certain, as a consumer, that you are getting into a closed-end lease, which allows you to walk away from the vehicle once your lease contract is over. Open Ended leasing contracts are primarily for businesses, and more information can be found here:
- If you are considering Lease-to-Buy
It's almost always more expensive to lease-to-buy versus outright purchasing, because you usually end up financing your purchase price once the lease is over anyways, which can end up driving up total costs.
Lease contracts often include Gap Insurance
Gap coverage, or gap insurance, pays the difference between what you owe on your lease, and what your vehicle is actually worth if your vehicle is stolen or destroyed. If you are traditionally financing your vehicle, it is unlikely that this is the case. Because financial loans pay interest first when setting up payment structures, it can be very shocking to the consumer if something unfortunate happens early on in their automobile purchase, and the principal loan balance is much higher than the used car or truck value.
Consider the sales tax implications and possible benefits
Because you are not buying the car or truck outright, the amount of sales tax is only factored by the depreciated value that used up during your lease. As a result, your tax responsibilities are less (this does not necessarily include state-specific taxes etc).
- But also consider auto insurance
On the same line of thinking, because you are financing, the leasing company will require you to maintain certain insurance coverages, which may be higher than what you had been accustomed to. It's best to get a quote from your insurance company to determine if your insurance rates will be significantly higher (or lower).
Remember to keep project and track of your miles
Understand how many miles you are allowed and how much you intend to drive on an average basis. Also, understand what the charges will be if you go over the mileage requirements and if there are opportunities (should you need them) to prepay for additional miles at the signing of the lease agreement. These prepaid miles will almost certainly be lower than what you would pay for excess mileage at the end.
It's not your car - customization is not allowed
A leased car doesn't belong to you, so you cannot make modifications and install custom equipment. If you do, you'll likely be charged for the cost of repairs to undo what you've done, so be aware of that.
Consider longer-term leases to capture the lower residual value
Remember that most vehicles lose the most value in the first 24 months, that's why 24 month leases are usually higher than longer-termed leases. After the first 24 months, depreciation of the residual value starts to taper off and become more flat.
Remember, leasing doesn't help build equity
The value in leasing is that you can use the money you saved from financing a complete car purchase towards alternative things. Remember that regardless of buying or leasing, you never get the value back from the depreciation of the vehicle.
Remember that you get your security deposit back
Assuming that you have not damaged the vehicle or done something that violates the contract, you will always get your security deposit back at the end. This is another reason good credit can help, because you may not be required to have a security deposit in the first place.
The Other Fees: Documentation, Registration, License, Tag, and Title Fees still apply
Understand the leasing contract - or at least know what you will be presented with to sign
It's highly recommended that you actually pick up a blank leasing contract before you actually agree to sign a completed one. This way, you are familiar with some of the language that will be presented and can ask questions ahead of time. For a good explanation of the elements of a leasing contract, check out these resources:
- LeaseGuide's Detail on Auto Lease Contracts
- Remember: Always negotiate the price of the vehicle, not the amount of the payment
Dealers will try to sell you on all the benefits of the low monthly payment. While the advantages and benefits of this feature are pretty obvious, your negotiated price is what will determine how fair your monthly payments are, in comparison to similar models and leasing plans.
Your lease is still a contractual obligation
Signing a lease means that you agree to make regular monthly payments, keep appropriate insurance, pay any vehicle taxes and licensing fees, and take good care of the vehicle over a set duration of time.
- If you get a lemon, make certain to understand the laws and regulations set by your state Attorney General's office
Finally, don't sign a "purchase/lease agreement" until you've settled on a deal and are comfortable with all of the specifics.
At the end of your lease, you usually have three options:
- Return the Vehicle
- Extend Your Lease
- Trade In
Keep track of what your value is in the car or truck that you are leasing. For example, if you did not use the majority of miles under the guidelines of your contract, you may have a much more valuable vehicle than what was to be anticipated. That can be factored into what your options are for a lease extension or trade-in.
What can or cannot become an added cost at the end of your lease
At the end of the lease you're expected to return your vehicle to the leasing company with no more than normal wear and tear. Note that there are traditionally mileage limits set when leasing a vehicle, so you will be charged if you end up going over the allotted miles assigned to the contract.
Ending your lease early
If you have to end your lease early, make certain to understand all of your options, and get advice on what the best options are for your situation. The decision to end your lease early may be costly for you, but not knowing your options may be even more expensive.
Resources and information on leaving your lease early
Final Conclusions
It's important to understand how the vehicle lease works in order to determine if they are the right option for your car buying needs. If you do not come to the buying table aware of the leasing structure, fees, how payments are calculated and what you are responsible for, leasing can become a painful and potentially expensive responsibility. However for most people, leasing offers a cost-effective way to drive a new car or truck, and avoid the hassles and risks of major automobile maintenance and repair.
Additional Resources and Websites Related to Leasing Vehicles
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