Leasing a Car – What You Need To Know

An Automobile Lease Might Be The Best Choice For You But Beware

Advantages of Leasing

An automobile lease is confusing to most people. It is not generally understood: the paperwork is complex and leasing terms are difficult. If you don’t know anything about leasing, don’t do it until you have read all of the tips in this leasing guide.

Buying a car and leasing one had been compared to buying a house and renting an apartment. With a car purchase, you make the monthly payments until it’s paid off and your lender hands you the car title. The car is yours. Just like buying a house, after a certain number of mortgage payments, the house becomes yours. In an automobile lease, it’s just like renting an apartment. You keep paying the rent but the money that you give the landlord goes to him. No portion of it in the form of equity goes back to you. You can say your money goes to waste. But you had a place to stay and as far as leasing a car, you have a car that is useful to you, that enables you to go places.

Leasing isn’t for everybody; buying a car isn’t for everybody either. They have their own advantages and disadvantages.

With new car , you need money for down payment and that makes the first year of ownership expensive. After that, the costs somewhat goes down but you still have car maintenance and insurance to contend with until it’s paid off. Leasing is inexpensive at first, it requires lower or no down payment but remains high each year for as long as you continue leasing.

An automobile lease therefore is for you if you meet the following conditions:

  • You do not drive a lot of miles.
  • You use your car for business purposes.
  • You cannot afford a large down payment on a new car.
  • You would like to or need to have a new car every few years.
  • You would prefer not to deal with maintenance issues.
  • You don’t like to go through the hassle of having to sell or trade your car when you want a new one.

Most car leases limit you to 12000 miles/year. If you drive less than 12,000 per year, then leasing is for you. If you do and you lease a car, you’ll end up owing thousands in mileage penalties at the end. Penalties are usually 18 to 21 cent a mile for exceeding the limit. If you have a three-year lease and you go over 1,000 miles per year, you went over 3,000 miles and at 20 cents, you’ll have to cough up $600 in penalties.

An automobile lease may offer tax advantages. If you own a business, generally the tax benefits of leasing are greater than if you buy a car outright. When you buy a car, the payments aren’t always deductible, while lease payments sometimes are.

Car buyers who don’t have money for down payment might consider leasing. You may or may not have to put a down payment but be careful.

Some people would like to have a new model every year. It’s a personal preference, one in which some people delight in doing. It gives them a kick in owning a new model every few years. Some car models ‘tho, especially the sporty ones require a substantial down payment so let’s say a BMW’s monthly payment is being shown as only $250, the required $3,000 down payment amortized for 36 months actually costs you another $83 per month.

Women especially could be at the mercy of unscrupulous car repair shops. Owning a new car provides them with the peace of mind that comes with not having to deal with car repairs.

And lastly, not having to sell or trade your car when you want a new model is attractive for some people. It’s not easy to sell a car . Trading one at the dealer when you buy a new car surely is a money-losing venture. But an automobile lease every 3 years is a never-ending cycle though of never experiencing car ownership and which might prove to be more expensive than outright car ownership.

Disadvantages of Leasing

To lease a car is not for everybody. It might not be ideal for you. Leasing is unattractive to many people because most people don’t understand it. If you like car ownership and would like to drive your car to the ground, leasing is not for you. Instead of buying new car with a bank loan, you rent or lease the car for 3 or more years then give it back to the leasing company at the end.
Having an automobile lease is a way to drive more car than you can afford and change cars every 3 years without the hassles of trading in an older car for a new one. It’s a simpler way to “have” a car for transportation.

But it’s also a perpetual money drain because you keep on making car payments month after month. To buy a car is initially more expensive. There’s the down payment during the first year but the monthly payments stop after 4 or 5 years, depending upon the terms of your car loan. After that you gain ownership of the car and save money, as opposed to leasing, as you only have to worry about maintenance.

To lease a car has disadvantages and here they are:

  • It does not necessarily cost less. Although monthly payments for leased cars are often lower than those for purchased cars, this is not always the case. There are fees a-plenty and you will not like some of them.
  • You will not own a leased vehicle, period. The money you spend each month does not go towards buying the car. After the lease, the car goes back to the leasing company.
  • The mileage restrictions will be burdensome if you fail to plan your driving. If you drive more than 12,000 – 15,000 miles per year, to lease a car is probably not for you. Exceeding your allotted mileage will cost you – usually around 15 cents for every mile over your limit, and 20-25 cents for luxury cars. So, if you go over 5,000 miles on your Lexus , you can expect to pay about $800 to $1,000 at the end of the lease.
  • You pay for the condition of your car at the end of the lease. End-of-lease terms require you to pay for anything the dealer deems to be “signs of excessive wear and tear.” They often nit pick when you bring the car back, finding ways to keep your “refundable security deposit” for excess wear and tear
  • Lease termination will cost you. Whether you choose to end the lease early or your car is stolen or totaled, or hit by lightning, you will be looking at termination fees. To lease a car can be dangerous to your wallet.
  • Insurance is usually higher when you lease. Leasing companies usually require you to buy minimum insurance policies of $300,000 and that’s way more than most people normally buy.
  • Selling price is usually MSRP and some dealers are good in hiding this from you by diverting your attention to low monthly payments.
  • Fees during signing (Dealer Acquisition fees or leasing company fees ranging from $500 to $700) and fees at end of lease (disposition fees of around $400)
  • Some dealers who refuse to itemize your trade-in might end up not crediting you for it. In other words, you will get taken.
  • Confusing finance Charges. In leasing, the term is called money factor. Because of the way the paperwork is set up, you’ll get confused with finance charges. Some dealers might end up charging you a high finance charge even if you have very good credit. Instead, they will have you focused on the supposedly low monthly payments.

Lease vs Buy: Which is the Better Decision?

To lease vs buy is a hand-wringing decision for some. There are advantages and disadvantages in each one, there are advantages in leasing that outweigh the advantages in buying. It all probably boils down to your personal preference, what you’re happy doing, and what your unique personal situation dictates.

Leasing could be attractive if you have a business where there’s some tax advantages to it. Also, if you are young and carefree and enjoy the freedom of going in and out of styles, going in an out of the latest car models and their gadgets, leasing might be the most preferable although not the most practical or cost effective. There are some hidden costs to leasing and if you are not well-versed in them, you might be in for some surprise. Lease vs buy therefore must be looked upon closer.

Owning a car is the most practical thing to do for some people although not the most desirable. You have to contend with the work of selling or trading your old car for a new one at the car dealership. But that’s the job of this website. Elsewhere in this website, car buying tips abound and if you read them and become familiar with them, buying another one becomes easier.To lease versus buy car should not be an uncomfortable decision like going to the dentist.
Lease vs buy ‘tho becomes less of a dilemma as you read through the advantages and disadvantages of each one, as you become familiar with the intricacies of both.

You already learned of some reasons why leasing is ideal for your situation:

  • You do not drive a lot of miles.
  • You use your car for business purposes.
  • You cannot afford a large down payment on a new car.
  • You would like to or need to have a new car every few years.
  • You would prefer not to deal with maintenance issues.
  • You don’t like to go through the hassle of having to sell or trade your car when you want a new one.

But there are more to this lease vs buy arguments. Here’s more advantages to leasing and remember, the perceived advantages are dependent upon your point of view:

  • As the cost of new vehicles has risen, leasing is more affordable than buying.
  • Lower sales tax because tax is only paid on the amount of the car’s value used, about half the amount of the car’s total value over three years – the usual lease term.
  • You pay less for maintenance. You are usually not responsible for paying for repairs unless you get involved in car accidents which is your responsibility.
  • Cars depreciate in value and when you drive them out of the dealer lot, it already lost some. When leasing, you are only paying for the depreciation of the value of the car during the lease period.

Buying is the method of choice for most car buyers. Only about 20% of new-car transactions are leases and consumers are pretty consistent about their buying habits. But the 80% of car buyers are probably right. The lease vs buy argument might go in favor of buying because for the average person, it’s the one that makes the most sense.

The problem for the person who leases is that they are subjecting themselves to a life of having to make a car payment every month. They always lease a car to satisfy the craving for driving a car which they can only afford by leasing it. They never stop paying for a car, because they are always leasing or borrowing from someone else. At $350 a month they are shelling out $4,200 a year, every year, maybe for the rest of their lives.

The lease vs buy argument is arguably in favor of buying a car outright. If you bought a car, pay $350 a month (I’m sure that car is a decent, no-frills one) and pay it off in 3 years, let’s calculate how much money you would have in the bank if you didn’t buy another car for 9 years. (The person who leases had gone through 3 leases during that time and for illustration purposes had been paying the leasing company $350 per month for 9 years).

If the buyer, who was paying $350 in payments, put that amount instead in an account that yields 6% a year for 9 years, his money would have grown to $49,958.00. Almost 50 grand. You can make the argument that the guy who kept his car would be paying for repairs and such but if he spends $1,500 on repairs per year, that would be $13,500 in 9 years. Subtract that amount from 50 grand and we see that the buyer has a fat $36,500 sitting in his account while the person who leases has zilch, nada, zero.

Lease vs buy , which is better? As the example above illustrates, buying a car, instead of leasing makes sense.

What To Do To Get The Best Lease Deals

Lease deals might not be favorable for you if you shop around for a car to lease and you don’t have any idea how to get one. Ignorance will cost you plenty, not because you will get scammed by dealers (although some are unscrupulous enough) but because without a clear knowledge of the leasing game, you will fall for unfavorable deals.

First of all, keep in mind that when you lease a car , just as when you buy one, its cost is negotiable. Nothing is set in stone. The lower the total price, the lower your lease payments will be.

Also in case you don’t know, when you lease cars, a separate leasing company actually buys the vehicle from the dealer and then charges you the monthly payments for it. However, you will be working entirely with the dealer throughout the leasing process. They handle all of the paperwork for the the leasing company.

To get the best lease deals, keep the car’s costs down. Choose a model that has a higher resale value. There are some sources for this information. You can consult a used-car pricing guide to see how well a vehicle’s value has held up historically, ask the loan department of your bank or a leasing company to compare new vehicles’ residual values. Go to your local library and ask if they carry the Residual Percentage Guide issued monthly by Automotive Lease Guide. Charts estimate how much each vehicle will be worth after specified periods of months, as a percentage of the car’s original selling price. This gives a clear picture of which cars hold their value best and are therefore your best choice for leasing. Avoid those with low residual value, because those cars will cost you money at the end of the lease.

Look around for good lease deals, especially one when a car manufacturer is trying to promote a specific model. Sometimes, its leasing terms might be even more favorable.

Make sure you compare costs for identical vehicles. A lease with low monthly payments and a hefty down payment might cost more overall than one with higher monthly payments but no money down. Do the math, and consider the total amount that you’ll be paying-both now and over the leasing term. A free calculator below can tell you your monthly payments and the interest charged to you if you know the cost of the car, the interest rate, and the terms of the loan (usually 36 months).

New-car dealers are a good place to start your shopping. You can use leasing agents or brokers that lease several brands. Some banks and credit unions also offer consumer leases.

To get the best lease deals, you need to familiarize yourself with some lease terms that leasing companies employ. Their terminology is quite different from conventional auto and mortgage financing and is quite confusing.

Capitalization Cost (cap cost): The total price of the vehicle, which the lessor uses to calculate the amount that the customer will be paying. This is equivalent to the purchase price of a vehicle that’s sold.

Cap Cost Reduction: Equivalent to a down payment on a purchased vehicle, this is the amount that you pay when signing the lease, in addition to any separate fees that are assessed. When you pay a larger sum initially, monthly payments will be lower. A smaller cap cost reduction means a higher monthly payment. The value of your trade-in (if any) can be applied as part of this amount. You know if you have good lease deals if your trade-in has been factored in by the dealer.

Residual Value: A prediction of what a vehicle is likely to be worth as it ages, usually expressed as a percentage of its original price. Residual values may be supplied for vehicles that are 24, 36, or 48 months old

Security Deposit: A deposit, usually refundable, required before the lease contract takes effect.

Depreciation: The amount by which a vehicle loses its value over a specified period of time, which is the difference between its original price and its residual value later. It’s usually supplied by the Automotive Leasing Guide (ALG) or equivalent. No specific figure for depreciation appears in lease contracts, but it’s taken into account in setting residual values. If you have less depreciation, you got good lease deals. That’s why it’s good to know what car models depreciate the least (loses minimum value during the terms of the lease).

Money Factor: You probably won’t hear or see this term, but it’s the cost of money, equivalent to an interest rate.

Don’t tell the dealer you are leasing until you agree on a selling price. Negotiate the car down to a good selling price as though you’re buying it. Then if you want to lease, the purchase price becomes the gross cap cost for the lease.

The value of your trade-in (if any) can be applied as part of Cap Cost Reduction. Good lease deals result when you are able to maximize the amount of your trade in. Watch out for some dealers who bump up your capitalization cost to MSRP after the amount of your trade in had been factored. Because of the complex nature of the paperwork, it’s hard to see if it’s there. Look at the figures and don’t be afraid to start asking questions. After all, it’s your hard money which is involved here.

An important warning about Money Factor. Some unscrupulous dealers avoid telling you the selling price of the car, quoting only the monthly payments. Dealers are not required to divulge the interest rate. Be cautious of artificially low interest rates. They might quote a low money factor, but if you check out their numbers, it’s really higher. If they amortize some of the closing fees like security deposit and dealer acquisition fee into the lease, tell them you want to pay cash up front for it. To assure yourself of getting good lease deals, ask them in writing their interest rate (money factor).

There are two types of car leases: closed-end and open-end.

Closed-end leases allow you to walk away from the car at the end of the lease term. If you owe for any mileage coverage or unusual wear and tear, this is when you’d have to pay for it. This is when they tell you that your Security Deposit pays for the wear and tear. Most consumer groups suggest that the closed-end lease is the best option, because it poses less risk upon the expiration of the lease term.

With an open-end lease, you must purchase the car at the end of the lease period for a predetermined amount. This is often the type of lease used by individuals who have high mileage or by businesses. Wait until the end of your auto lease to ask the leasing company if they will sell the car for less. If you are not careful, you might get charged thousands of dollars above market value. Always research the value of your car by going to free internet websites and show up at lease termination with a check in the amount you want to pay. Haggle with them. The used car that you’ve been driving during the last 3 years had gone depreciated 50% so be smart to get the best lease deals.

Make sure you read and re-read the information in this website.

You Can Exit A Lease Through Lease Assumption

To exit a lease is a relatively new idea that is gaining ground. Although many people still don’t know that you can conduct business this way, more and more car buyers are becoming aware that this thing exists. Leasing is often advertised as an affordable way to get into a nicer car than you might otherwise be able to afford, it helps to know a way out. Exit car lease and to realize that it’s a win/win situation for consumers and automakers alike. Initially, automakers’ finance companies were resistant to the idea of their customers’ leases changing hands but now, they’ve come aboard the bandwagon.

Some 80 percent of leases can be transferred completely with no strings attached. But approximately 10 percent of leasing companies require the original leaseholder to retain some liability for the vehicle even after it is transferred. Nissan/Infiniti and Honda/Acura fall under this category. Whether you can even break a lease financed by Honda Financial Services depends on where you live, so check with the company before listing your car or attempting to assume a Honda/Acura lease swap .

Another 10 percent of leasing companies don’t permit leaseholders to exit car lease at all: usually bank-based companies such as Chase Auto Finance and Huntington Bank Leasing, or smaller credit unions. This is an important factor to remember if you decide to lease a new automobile in the future.

Just keep in mind that to exit car lease is still hard to do. Look at your paperwork to find out about any the fees and penalties you agreed to pay if you turn the car in early. Leasing a car is a commitment. Leasing companies will not easily get you off scot-free. After all, they’re there to make money off you.

Be reminded that leasing companies have analysts figure out how much the car is likely to be worth at the end of the lease term and how much they’ll be able to sell it for (to you or to someone else). You’re essentially paying to drive the car as it depreciates, and if you could exit the lease whenever you wanted without penalty, the formula no longer works.

One notable exception is if you are in the military, have an auto lease, and have been ordered to move overseas or deploy. Under certain circumstances, the Servicemembers Civil Relief Act (SCRA) allows active duty service members to terminate an auto lease without having to pay early termination charges or a penalty.

In order to exit a lease under this law, you must have entered into the auto lease:

  • Prior to active duty, and then been called onto active duty for 180 days or longer; or
  • During active duty, and received orders for a Permanent Change of Station: from a location inside the continental United States (CONUS) to a location outside the continental United States (OCONUS), or from a location in a state OCONUS to any location outside that state, or be deployed with a military unit or in support of a military operation for 180 days or longer.

In a lot of cases, especially if you’re near the end of the lease term, it’ll probably be cheaper to ride it out than to pay to exit a lease. However, if you simply can’t keep your leased car until the term is up, you can do one of three things:

  1. Have somebody take over your lease. Go to this site’s page about that: taking over a lease.
  2. Trade in your leased car, hoping that it already has equity and buy a new car if you are able to do it.
  3. Go to a dealership and try to sell it there, instead of to a private buyer, since you won’t be able to hand over the title until the outstanding lease payments and any applicable fees are satisfied.

It’s good to know that you can exit a lease, hoping that other options are available to you.