The Facts of Leasing
More people these days are choosing a lease over purchasing their new car. There are benefits - the big ones being lower monthly payments, having a new car every few years, and low maintenance expenses. There are also downfalls, including mileage restrictions, confusing agreements, and the fact that you never really own your car. If the idea of renting a car long-term is appealing, Leasing can be a good thing, provided you do your homework and shop around for the best deal.
People who lease usually like to drive a new car every two to four years. They don't mind always having a car payment, especially if it's lower than a loan payment on a comparable vehicle. They don't drive long distances that rack up miles quickly, and are careful not to damage their car or otherwise jeopardize their security deposit. They also don't get too attached to their car, since it will likely go away at the end of the lease. If this sounds like you, read on. If not, purchasing a car may be the way to go. Once you lease a car there's no "cooling off" period to reconsider, and getting out of a lease early can be very expensive.
Leasing involves some unfamiliar terms and calculations the dealer uses to draw up your contract:
- Acquisition fee: An extra fee charged by the leasing company that may be added to your monthly payment, or paid up front.
- Adjusted capitalized cost: The car's cost, less deductions (such as your trade)
- Capitalized cost: The total cost of the car, including extra insurance, warranties, and the options you've agreed to pay for.
- Disposition fee: A fee sometimes charged by the leasing company to clean and repair your car after you turn it in.
- Gap insurance: Insurance coverage in the event your car is stolen or totaled, and its value is less than what you owe on your lease.
- Money Factor: The number dealers use to determine the interest payment on your lease. Typically, that number multiplied by 2400 will equal your interest payment. This number varies between dealers.
- Net trade in allowance: The difference between what you're getting for your trade less what you owe on it.
- Purchase option price:The set price you'll pay for your car if you buy it after the lease is up.
- Residual value: The estimated value of the car when the lease is up. This value is determined when the car is new.
- Security deposit: Typically one month's payment, refundable if you return the car in good condition.
- Monthly payment: Monthly depreciation + interest charge + tax
- Monthly depreciation: (Adjusted capitalized cost - Residual value)/Months in lease
- Monthly interest charge: (Adjusted capitalized cost + Residual value) x Money factor
- Monthly tax: (Monthly depreciation + Monthly interest) x Tax rate
- Total monthly payment: Monthly depreciation + Monthly interest charge + Monthly tax
Not all leases are created equal! Stop by several dealers and compare their lease offers on similar cars. Negotiate the price of the car as if you were buying it, and discuss leasing once that price has been set. Avoid high cost extras like rustproofing and extended warranties - you probably won't use the car long enough to take advantage of them. Make sure your trade-in and other negotiated credits are listed on the lease form before you sign it. And compare your total monthly payment to a loan if you were purchasing the car. Remember, you won't own anything at the end of your lease, whereas you'll own a car at the end of your loan.