What You Need to Know Before Leasing a Car
By Andrea Cannon
Leasing is now more popular than ever. In fact, Millennial car buyers are leasing 46% more over the past five years because they are able to afford their dream car at a much lower cost. If you've thought about leasing a vehicle, then we've provided what you need to know before visiting the dealer.
Benefits of Leasing
You will pay for the car while you need it, and at the end of your lease, you'll simply return it.
There are a number of other benefits associated with leasing a vehicle, such as:
Lower repair costs, because the warranty will cover most of them.
- Lower sales tax, since you'll only be responsible for paying sales tax on the portion of the car you finance.
- Lower monthly payments compared to buying.
- Typically, there is no down payment, or a very low down payment, required.
- Fewer obligations — at the end of your contract, you simply turn in the keys and walk away.
- New vehicles every few years. Once your lease term is up, you can choose a new lease and enjoy all the benefits and features of a new car. This also means that you can drive a better car for less money every month. On the other hand, you won't be able to customize your vehicle.
Lease terms usually last between two to four years. However, every leasing contract is different, so you want to find out specifics, like the length of the term and the mileage cap (which is typically between 12,000–15,000 miles/year).
Most drivers agree that leasing contracts can be very confusing, even more so than when buying a vehicle. If you'd like to go in as prepared as possible, consider reviewing some common contract terms. There's a long list of costs, terms, and fees on a lease contract, but the key items to look for are pretty clear.
Gross Capitalized Cost
This is the sticker price of the car. Like everything else in life, it's negotiable. Don't pay full price!
Adjusted Capitalized Cost
This is the price of the car less negotiation, rebates, trade-in, and down payment.
When you turn in the car at the end of the lease, the carmaker estimates it will still be worth something; the car's residual value. The higher this number, the lower the depreciation (and the lower your payments).
This is the value of the car over the months and miles you will be driving it. You can think of this as the rental fee for the car. Or you can think of it as Adjusted Capitalized Cost - Residual Value.
This is the interest rate you'll pay, but it's not a straight forward interest rate.To compare it with an actual interest rate, multiply it by 2400, so you have a better idea of the value of the loan. This is also negotiable.
This interest rate will be charged to the sum of Adjusted Capitalized Costand Residual Value. It seems like double counting, but you're paying for both the use of the car and money the finance company "loaned" you to lease the car. It may appear on your bill as Finance Charge or Rent Charge.
Monthly Lease Payment
Finally, this is what you'll pay each month. It's simply the Depreciation + Finance Charges + Sales Tax.
A good lease deal is one with the lowest Adjusted Capitalized Cost, the highest possible Residual Value, and the lowest possible Finance or Money Factor. Be sure to negotiate for all three!
Financing and Payment Options
As is the case when purchasing a car, you will have a number of financing options available to you when leasing. Make sure to research lease specials and financing options in your area before visiting a dealership. Use Edmunds' Price Promise tool to find special offers near you.
Leasing can be difficult if you don't have good credit. If you aren't getting the financing terms you're after, then the DMV recommends first working on raising your credit score, offering a higher down payment, or lowering the annual mileage of your lease. If you have a vehicle trade-in, this can be a great start for your down payment.
Remember, the higher your down payment is, the lower your monthly payments will be. On the other hand, some experts recommend putting as little down as possible because if your vehicle is wrecked shortly after leasing, you will be out of any money you invested upfront.