If you’re reading this, chances are you’re considering leasing a car.
So how do you lease a car, and what should you be aware of before driving away from the dealership in your new vehicle?
When you lease a car, you’ll make monthly lease payments for a vehicle that is usually brand new. Leasing is attractive to many people because you get to drive a car with all the latest bells and whistles without having to turn over a significant down payment or be on the hook for a multi-year car loan.
This guide aims to provide you with all the details you need to make an informed leasing decision.
Buying or Leasing a New Car: What’s the Difference
Although there are a few items in common between buying and leasing a vehicle, the differences outweigh the similarities.
Buying a New Car
When you buy a new car, the entire cost of the vehicle is due upfront. You can pay the full price of the car with cash. However, that’s not an option for most people.
Instead, you’ll likely need to qualify for and secure an auto loan. You’ll have added fees and interest if you take this route. A typical car loan is about 60 – 72 months. This means you’ll be making car payments for five to six years.
You can also use the proceeds from a trade-in as partial payment toward the new vehicle.
Leasing a New Car
When leasing a new car, you pay only for the difference between the current value of the vehicle at the signing of the lease and its value at the end. You’ll also need to pay interest and fees.
A vehicle that is expected to depreciate by $10,000 over the three years of your car lease will cost you $10,000 plus fees and interest.
Because you’re paying on only a portion of the total worth of the vehicle, your monthly lease payments will nearly always be lower than if you were making car payments on an auto loan.
In many cases, the difference between the two amounts can be quite significant.
What You Need To Know About Car Leasing
Leasing a car comes with its own set of terms that you need to understand. Just like any other contract you sign, it’s crucial that you acknowledge what you’re agreeing to. The terms on a lease can be confusing so we’ll cover the important ones below:
In the world of car leasing, the lessee is you. You’re the person who leases the vehicle from the leasing company or car dealership.
The lessor is the company that you sign the contract with to lease the car. While it can be the financing department of the carmaker, the lessor can also be a bank or other financial institution.
A leasing company can also be the lessor. Even if you go to a car dealership to lease your vehicle, it’s essential to understand that the lease contract isn’t between you and that dealership.
After you’ve negotiated the vehicle’s price and figured out its residual value, you’ll be able to find the difference between the two numbers. Use this to determine the down payment you’ll need to make.
The remainder is divided up equally according to the number of months in your lease agreement (the average is ~36 months).
That number is your monthly lease payment.
Sometimes referred to as the “cap cost,” the capitalized cost of the vehicle is its price. There is often room for negotiations when it comes to the capitalized cost.
There is no hard-and-fast rule when it comes to the amount of down payment. A good rule of thumb is between 10 and 20 percent of the vehicle’s cap cost. The more you pay upfront as a down payment, the lower your monthly payments will usually be.
Due at Signing
The due at signing amount is the money you’ll have to pay to sign the lease documents.
In many cases, this due at signing amount doesn’t include certain fees like taxes and the vehicle registration fees. However, the due at signing amount should include most of the fees from the dealership and the leasing company.
You might also hear this being called the down payment for your leased vehicle.
At the end of your lease, you’ll be charged a disposition fee. This fee is designed to compensate the leasing company or car dealership for preparing your leased vehicle for resale.
In some cases, this fee may be waived if you decide to purchase or lease a new vehicle.
The residual value is the amount that the leased vehicle is expected to be worth by the end of the lease. Independent companies, such as ALG, are responsible for establishing the residual value. This amount will be included in the lease documents you receive from the car dealership or leasing company.
In most cases, consumer vehicle leases are closed-end lease agreements. This is because the value of the vehicle at the end of the lease is its residual value.
The value of the vehicle at the lease’s end has no bearing if the lease is a closed end. A closed-end lease also allows you to walk away from the vehicle at the end of your contract.
In contrast, an open-end lease agreement means that you are responsible for paying the difference between the vehicle’s market value and its residual value.
End of the Lease
As the end of the lease approaches, you’ll have to make a decision about the vehicle. You can either walk away from the vehicle, purchase it or trade it in. About three months prior to that, start the lease-end process so you’ll have plenty of time to decide which is the right choice for you.
The money factor is the interest rate you’ll pay for a leased car. Though this number is expressed differently than you might be used to seeing, it’s easy to convert it into a typical interest rate.
Simply multiply the money factor by 2,400 to do so. For example, a money factor of 0.0021875 equals an interest rate of 5.25 percent.
Like interest rates charged for other types of loans, such as auto loans, the current lease money factor rates can fluctuate due to outside factors such as the economy. You might also be offered lower money factor rates if you have a good credit score.
This is a fee that’s charged by the leasing company or car dealership to set up the lease. In some cases, you can negotiate the acquisition fee. In others, this isn’t an option.
Car dealerships and leasing companies also differ in how they expect you to pay the acquisition fee. Some expect the fee as part of your down payment. Others build it into your monthly lease payments. Make sure you understand how you’re paying it.
A mileage cap is a strict number that limits the number of miles you can drive a leased vehicle over the course of the lease contract. If you go over that number, you’ll likely have to pay a fee for each mile above the limit.
Not all leasing companies and car dealerships require that you put down a security deposit. If yours does, it’s a way for them to protect themselves in the event something unexpected happens.
If you go over your mileage limits, for example, default on your leasing contract or damage the vehicle, these costs will come out of the security deposit. You’ll get your security deposit back if there are no costs at the end of your lease.
In some cases, you might have costs that are higher than the security deposit. You’ll have to pay the difference when your lease ends, and you bring the vehicle back.
How to Find and Lease Your Dream Car
Leasing a car requires some of the same basic steps as buying one. You’ll also need to take some factors into consideration that are unique to the process as well.
Step 1: Know Your Budget
It’s tempting to focus on how the monthly payment will fit into your budget. This isn’t the only figure you should consider though. To be able to compare different lease offers accurately, you’ll need to figure out the total cost of the lease contract throughout its term.
Step 2: Know Your Mileage
Because almost all lease contracts include strict mileage caps, you’ll need to be aware of how many miles you drive before you sign on the dotted line. If you live in the city and don’t take road trips often, these mileage caps shouldn’t be an issue. Go above them, though, and you’ll have to pay extra.
Step 3: Know How You Can Use the Leased Vehicle
Regular wear and tear is expected when you lease a car. Excessive wear, though, might mean that you’ll have to pay the difference. Parking on the street or in parking garages where your vehicle could get dinged and scratched, smoking, or transporting a pet are all activities that might not be allowed. Be sure to read the fine print in your lease contract carefully.
Step 4: Know Your Credit Score
Anytime you’re in the market for a new car, having a good credit score is important. This is especially true when leasing a vehicle. Before you start shopping around for a car lease, obtain a free credit report from the three agencies: Experian, TransUnion, and Equifax. Go to fnegto start the process.
Step 5: Know How to Negotiate
Don’t be afraid of negotiating leases. One good place to start is the capitalized cost of the vehicle. In many cases, this cost will fall somewhere in between the MSRP and the dealer’s wholesale price. The lower this price falls, the less your monthly lease payments will be.
3 Steps To Make Sure You Get the Best Car Lease
1. Check out the Carmaker
A carmaker will often post their lease deals on their website. The cars included in these incentives are often listed below the manufacturers suggested retail price (MSRP). This could mean that they are a good deal.
2. Browse Dealership Websites
Many car dealerships tailor their auto lease deals to meet the needs and desires of their local market. In addition, the lease terms offered by car dealerships can often be lower than those provided by the carmaker.
3. Work with an Auto Broker
An auto broker takes a lot of the legwork out of the entire lease process. From locating the vehicle you want to negotiating the auto lease terms and the purchase price, an auto broker can make the lease process seamless. In some cases, an auto broker will deliver the new car right to your home.
Protect Yourself: Steps to Take After You’ve Leased a Car
You’ve found your dream car and negotiated to obtain a price you think is fair. You’re now looking forward to driving off into the sunset and enjoying your new car for the next two or three years. Take the following steps to protect yourself after you’ve leased a car:
Opt for GAP Insurance
GAP insurance is technically known as guaranteed asset protection insurance. Many car dealerships and leasing companies require you to purchase it as part of a leased vehicle contract. This is because it ensures that your financial obligation to them is satisfied — even if the vehicle is stolen or you total it.
Even if the leasing company or car dealership doesn’t require you to purchase GAP insurance, It’s still a good idea. It provides you with protection from having to pay the difference between what your car insurance company pays if the market value of the vehicle is lower than the buyout cost of the leased vehicle.
Keep the Credit Card Test in Mind
At the end of your lease agreement, chances are the vehicle will be sold as used if you decide not to purchase it. Many leasing companies and dealerships use the credit card test when deciding which scratches and dents you’re responsible for.
If the damage can be covered by a credit card, you usually won’t have to pay any additional fees. It’s important to understand, though, that every car dealership and leasing company is different. The credit card test is a good rule of thumb, but the leasing company you’re dealing with might use a different method.
Be Timely with Lease Payments
Making your lease payments on time is the best way to protect your credit score, meet your obligations to the leasing company, credit union, or bank, and avoid defaulting on the lease. One way to make sure that making the monthly payments doesn’t slip your mind is to set it up, so it is automatically paid from your bank account.
End Your Car Lease the Right Way
As the end of your car lease approaches, you’ll have some decisions to make regarding your end of lease options. The following suggestions can help you evaluate them.
For best results, start the end of the lease process about 90 days before your car lease actually ends. This gives you plenty of time to research and consider all your options.
Make a Decision
Essentially, you’ll have to decide between three choices: do you want to give up the vehicle, trade it in on something new car or buy it outright? If you are going to use it as a trade-in for a new vehicle model or you’re going to simply give it up, be sure to remove any custom items.
You should do this even if the customizations increase the leased vehicle’s value. Most leasing contracts require you to return the vehicle with the same equipment it had when you leased it.
Familiarize Yourself with Your Lease Agreement
If you’re like many people, you haven’t read your lease contract since the day you brought your vehicle home. Life is often too busy to refresh your memory about it on a regular basis.
As the end of your lease approaches, though, reread your lease agreement. This way, you’ll know if you are responsible for any additional fees — such as disposition fees — and how much they’ll be when you bring the leased car back.
Bring it Back in Pristine Condition
Make sure you spend time cleaning your leased vehicle — inside and out. If you’ve taken good care of it during the lease period, this should be an easy step.
Approach this cleaning with the same vigor you would use if you were preparing the vehicle for sale. You can also use this opportunity to note any damage so you can be prepared if the leasing company or dealership mentions it.
Car leasing is a convenient and affordable way to drive the kind of new vehicle you’ve always dreamed of while still having low monthly payments. With plenty of options and flexible choices, leasing a car also means you can upgrade every two or three years.