Over 4 million of the vehicles in the USA today are leased cars. And, lease volume has grown by an astonishing 91% while accounting for more than 30% of all new vehicle sales. How can one let the opportunity to afford a dream car at a much lower cost pass them by? However, as with every purchase, it is important to understand the basics of leasing and the details required to help protect yourself against fraud.
This Guide Covers the Following Points:
- What exactly is a car lease? – You will understand what leasing a car means.
- Benefits of leasing a car – Reasons why you could consider to lease a car rather than buy a new one.
- Key leasing contract terms - So you fully understand what is proposed to you.
- Main questions to ask the dealership - From gap insurance to mileage cap, everything you need to know to make a more informed decision.
- If and when leasing a car is a better option than buying a new one.
- The steps to follow to lease a car – We have broken down the process in several easy steps.
- Most common mistakes you might want to avoid when you are about to lease a used (or a new) car.
- Best ways to lease a vehicle – We share tips to land the best car lease deal.
What is a Car Lease?
It is an arrangement between you and a leasing company, in which you pay the company for the right to drive the vehicle you have – let's say "borrowed for a specific period of time" (meaning leased from them). Every month, you make payments to maintain the right to drive the car for a period of 2 or 3 years (on average - could be less or more, depending on the deal ). Note that you don't build equity with your monthly payments, so you will not own the car after a specified period of time.
Why Lease a Car?
As opposed to buying a vehicle, leasing a car is a short-term rental option that allows you to pay for a car. Once you are done with it and no longer need it, you may as well return it. Beyond this, leasing a car comes with:
- Lower repair costs (the warranty covers most types of repairs);
- Lower sales tax (you pay sales tax only on the portion of the vehicle you finance);
- Very low or even zero down payment;
- Lower monthly payments than buying a new car;
- The opportunity to drive a new (and better) car every few years.
Leasing Contract Key Terms
The leasing terms differ among contracts. The leasing contracts usually last between 2 and 4 years, and you do need to fill out specifics (i.e. mileage cap and length of the term). The key items to look for on a lease contract are:
- Gross Capitalized Cost – It refers to the sticker price of the vehicle and it is certainly negotiable.
- Adjusted Capitalized Cost – It is the actual price of the car (less trade-in, rebates, down payment and negotiation).
- Depreciation – Consider this rental fee for the leased vehicle. This term refers to the value of the car over the miles (and months) you will be driving it.
- Residual Value - This is the value the vehicle will have at the end of the lease. Note that the lower the residual value, the higher the depreciation, and the higher your payments.
- Monthly Lease Payment – As its name suggests, it is the money you will need to pay every month, meaning the sales tax, finance changes and depreciation put together.
- Money Factor – To find out the interest rate you will pay (and the value of the loan), you need to multiply the money factor by 2,400. You will see this interest rate charged to the sum of Residual Value or Adjusted Capitalized Cost, and it could appear as a Rent Charge or Finance Charge on your bill. Again, money factor is negotiable.
Tip: To get a good lease deal, make sure you negotiate the lowest possible Adjusted Capitalized Cost and Money Factor and the highest possible Residual Value.
Questions to Ask the Dealership
- If Gap Insurance is Included – If your car is damaged during an accident or stolen, GAP insurance will protect you so you won't have to pay any extra fees.
- What the Warranty Covers – You need to know what repairs and maintenance services you will be responsible for. If there is the option of extended warranty, it should also be mentioned. To check more details about most common warranty scams, read this guide.
- Total Cost – You will most likely have much lower monthly payments than buying a new car, but you do need to make sure that leasing is indeed your best option. So, ask for the total amount of money you will be paying in the end, not just the monthly repayments.
- Early Termination of the Lease – If you need to end your lease early, it is important to know that you can do so without having to endure hefty fees (up to 6 extra months of payment). Therefore, ask the dealership if they allow lease transfers, to save yourself a lot of frustration.
- Mileage Cap – It typically is between 12,000 and 15,000 miles annually, but it is better to check with the dealership to avoid any issues in the future (going over the mileage cap as specified in the leasing agreement could result in another fee – potentially between $.10-$.25 per extra mile driven).
When and Why Leasing a Car is Better than Buying One
Pros & Cons
When trying to figure out what makes more financial sense to you, there are a few things to consider.
- Your monthly income/expenses ratio – Leasing a car leaves you with more cash on a monthly basis. This is because you will be paying a lower monthly payment (instead of paying for the entire vehicle cost; so, you only pay for the depreciation of the vehicle during the years leased), compared to buying/financing a car with the same loan terms.
- Initial fees & savings available for a down payment - Most of the times, you will be asked to make a low down payment. And, if your lease agreement doesn't have low down payments, your dealer may eliminate the down payment. That aside, given that the tax of a leased car is usually not charged to the total cost of the car but rather to the monthly payments, you also pay less for the sales tax on a lease.
- The mileages you make – If your daily routine requires you to drive a lot (over the 15,000-mile window lease agreements usually give), then you should consider the cost per extra mile and negotiate the lease (i.e. you could buy those extra miles upfront).
- Your driving habits – If you are too harsh on a car or tend to be careless, a lease will probably not be your best option because you will need to pay for any wear-and-tear caused to the car. The charges for such damages vary; however, you will most likely have to pay a total of around 3 months' lease payments .
To help decide whether to lease or to purchase a car, you may use one of the many online calculators available that calculate loan and lease fees, annual depreciation, interest and other factors.
So, all in all, leasing is a good option if you only need a car for a few years and love driving a new, better and fancier car. Moreover, if you can also easily afford to make monthly payments for a long time (due to continuous leasing), chances are leasing is a reasonable lifestyle for you.
If, on the other hand, you want to drive with the lowest possible cost, then leasing will be a more expensive option for you in the long run. The lower monthly payments are great, but leasing has high fees and interest rates, which can quickly accumulate over the years. You are also not a good candidate for leasing if you travel a lot (by car, of course), especially if you are driving in poor conditions, as you will probably need to pay extra charges (for additional depreciation). Finally, if you cannot afford the monthly payments of a car loan (in case you buy a car), then you can consider buying a used vehicle or buying a basic model, which are lighter on your pocket.
Of course, there is always the option to lease used cars, which is an increasingly popular alternative to leasing a new car.
How to Lease a Car: 3 Easy Steps
There are few easy steps to follow:
- Choose the type of a car you want (i.e. sedan, convertible, etc.) & model.
- Take it for a test drive and check whether the car comes with head-protecting side bags, ABS (anti-lock braking system) and ESC (electronic stability control).
- Compare the quotes you have received on the different models and decide on the amount you can afford to pay every month.
After you complete these 3 steps, you can go back to the dealership, and put forward your negotiation skills. Talk about the purchase price, which will determine the sum of your monthly payments. A good price is between the manufacturer's suggested retail price and the wholesale price.
Mistakes to Avoid When you Lease Used Cars or New Ones
Some of the most common leasing mistakes the majority of consumers make are as follows:
- Their upfront payment – Prepaying a (large) portion of the car lease in advance to get the low monthly lease payments can be an issue if the car is stolen or damaged in the first few months. It is a problem for the consumer because the leasing company will get reimbursed by the insurance company for the value of the car, leaving the consumer with no car and a lot of money lost. So, it is best not to pay more than a couple of thousand dollars upfront.
- Their Insurance Coverage – As previously mentioned, in case a leased car is stolen or totaled, the leasing company receives payment from the car insurance company. However, most of the times, the sum they receive does not cover the driver's obligations under the terms of the lease. This means that unless the drivers have gap insurance, they are called to pay the balance out of their own pocket. Therefore, it is crucial that the lease plan includes gap insurance coverage.
- Their Mileage – Beware of leasing companies with particularly low monthly payments. They may have very low mileage limits (you pay for any extra miles you drive beyond the limit). So, if you are planning to drive a lot, make sure the leasing contract covers the maximum miles you will make.
- The Maintenance of Their Car – The driver is obliged to cover any damage done to the car that is beyond the normal wear and tear, when they return the car to the dealer. As to what exactly "normal wear and tear" means, some companies have drivers pay for the smallest scratches while others are more flexible. Asking for the exact lease-end-condition instructions will save you from a lot of trouble and extra costs.
- The Warranty Duration – Leasing cars for much longer than the warranty period could mean that the driver will pay extra money for maintenance. This is because the car goes out of the bumper-to-bumper warranty. A bumper-to-bumper warranty is a warranty given by the car dealer that covers everything between the car's back and front bumpers. It usually lasts between 3 and 5 years). The cost for any maintenance required after the expiration of that type of warranty goes out of the driver's pocket. If you intend to keep the car longer, it might be a good idea to get an extended warranty.
Best Way to Lease a Vehicle and to Get a Great Car Lease Deal
First and foremost, select cars that depreciate less (or have a good resale value - aka residual value) so that your lease payment is lower. Then:
- find special offers near you but beware of special leasing offers that might hide a bad deal (i.e. a deal that requires a high down payment or allows less than 12,000 miles).
- get quotes from various dealers (ask them for the sales price of the car you want) and never forget to price the car (i.e. use Edmunds pricing website). A handy way to spot a good deal is to see how much the car dealer is charging over the invoice price.
- get back to the car dealer that gave you the best quote and ask them to give you lease payments at the sales price they quoted. However, do not allow the dealer to set their own terms; do tell the salesperson that you want a lease for 3 years, with 12,000 miles, and a reasonable interest rate. If you can easily afford the monthly payments, then you can shake hands.
- before you sign the contract, double check that the terms and sales price in the contract are as agreed upon (and don't forget the gap insurance).
Find out more tips on how to get the best car lease deal possible. And, if you need to find the best lender to purchase the car from instead of leasing it, you could start with LendingTree.com, a platform that lists 100s of lenders. Or, you may ask the dealer whether you can purchase the leased vehicle for a discounted price, at the end of the leasing agreement. Now, you know if and why leasing a car is better for your lifestyle, as well as how to lease a car, the best way to lease a vehicle and whether you should lease used cars. Hopefully, you can now make a more informed decision and either lease your dream car or find the best options for your lifestyle and requirements.
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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal, medical, accounting, investment, or any other professional advice as individual situations will differ and should be discussed with an expert and/or lawyer.