Determine if leasing is the best option for you
There is no tax advantage to leasing, but it yields a smaller monthly payment. Remember that leasing does not give you the legal title of the vehicle. This means that at the end of the term you will have nothing to trade in for your next car.
Learn the terminology
Subvented/Subsidized lease
These are usually the lowest monthly payments offered by manufacturers who use below-the-market interest rates. The manufacturers also achieve the low fee by setting a higher residual figure and lower finance amount. As with all advertising, if a deal seems too good to be true, there’s a high chance that the car offered in a special program is not the exact one you’re looking for.
The lease components
MSRP: Cost of a car
Dealer discount: Dealer deduction
Cap cost reduction: Down payment
Capitalized cost: MSRP minus the sum of the dealer discount and cap cost reduction (a – (b + c))
Residual: Projected resale value at lease end
Depreciation: MSRP minus residual (a – e)
Lease term: Lease period (months)
Monthly payment: Payment
Money Factor: Interest
Wear & tear adjustment: Additional charge at the end of term
Understand how a lease contract works
Unlike the conventional auto loan where you finance the car in its entirety, a lease contract is designed so that you pay only for the usage. The lease contract first estimates the residual value (value of the car at the end of the lease) then deducts it from the MSRP. After, the balance (depreciation) is financed through the contract period which results in a substantially smaller financed amount compared to an auto loan.
Review points of caution
Lease/loan programs that advertise low monthly payments
If something says “OAC” (“On Approved Credit”), it means those with good credit will receive special prices. You may not qualify for this deal if you don’t have good credit but the salesperson might try to sell you on a separate, albeit more expensive program instead.
Warranty
Never lease a car longer than its factory warranty period. You don’t want to spend money repairing what isn’t even yours.
Excess Mileage
Each lease contract specifically states how many miles you are allowed to drive without penalty. Check your recent history of how many miles you drive per year (the average is about 15,000 miles).
Although it may not seem like much at first, penalties add up quickly. A 36 month lease based on 12,000 miles per year with a penalty of $0.15 per mile will add up to an extra $1,350 for someone who drives the average 15,000 miles. Some European fancy cars have 5,000 miles per year allowance and hefty $0.30 per mile penalty – that’s $9000 penalty at the end of lease if you drive 45,000 miles in 3 years.
Return Procedure
Check what your responsibilities are at the end of lease. There may be a $300-400 disposition fee on the contract and any visible damages to both outside and inside of the vehicle are subject to surcharge. Make sure the lease contract explicitly states what your obligations are at the end of the term.
Early Termination
Know the procedure for an early termination. In almost every case, you won’t be able to walk away without paying some penalty. You will either be asked for the full payment for the remainder of the lease, or charged the difference between the resale value and the remaining value of the contract.
Know who underwrites the lease
Once the contract is signed, it is usually handled by a financial institution and not the dealer. This makes it difficult to make complaints any time later since the finance company will have no knowledge of the conversations that occurred during negotiations at the dealership. They will only refer to what’s written on the contract, so make sure all details are stated explicitly.
Determine your insurance costs
Make sure you figure all the costs of owning a car when you purchase or lease a new vehicle. Your insurance premium can vary depending on age, gender, and the type of car you choose. For example, the insurance premium for a single male under 25 years old will yield a high insurance premium. Leasing and financing require you to carry a certain amount of minimum coverage so it’s important to know your insurance costs in advance.
Don’t mention a lease when negotiating a price
Negotiate the price of the car first, then ask for a monthly lease figure based on the price (cap cost). Note that many lease contracts don’t show the cap cost so you will have to request the information.
