All About Car Leasing

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Decision Time

It's time for your next car purchase, but you can't decide if you should lease or buy. You'd like to buy a new car, but buying new is expensive!

You know this:

Buying a used car is less expensive, but you don't want to worry about the inevitable maintenance and upkeep associated with owning a used car.

Leasing, on the other hand, affords you the luxury of a new car, but with low monthly payments similar to buying a used car-sometimes even lower. We know you have plenty of questions about leasing, so we've put together this document to help you understand if leasing is the best option for you, and how to get the most value out of your lease agreement.

What is a car lease?

A car lease is a way to obtain a car by only paying for a portion of the car's actual cost as opposed to paying for the entire car. Think of it as a pay for use contract. You are only going to use the car for a few years, so you only pay for the car's depreciation during those few years.

The length of time you drive the car is known as the the 'term' on the lease agreement. The term varies, but is typically between two and three years. Normally, you wouldn't want to lease a new car longer than three years, because that's around the time the manufacturer's warranty runs out. Leasing a car with an active manufacturer's warranty helps protect you in the event that the car is damaged or faulty.

Your lease payments are made monthly, and leasing a car does affect your credit score the same way a car loan would. So, late or skipped lease payments will drag down your credit score. However, a car lease is considered an installment loan, so they don't affect your credit as heavily as revolving credit will, like credit cards for example.

Is car leasing right for me?

Leasing a car is not for everyone, but there are particular situations that leasing is perfect for. Read through the list below to determine if leasing is something you should consider. As with all things, there are certain things you should understand before leasing. You can learn about the common misconceptions associated with leasing here.

Do you enjoy driving new vehicles?

One third of all new car transactions last year were done via lease deals. If you love pulling up in the latest car models, leasing may be something to consider. One of the greatest benefits of leasing a new car is getting the opportunity to drive the newest cars without paying the high monthly fees associated with buying them. New cars are also reliable, and you don't have to worry about maintenance as much as you would if you were to buy a used car. A new car most likely isn't going to need brake pads replaced during the term, and as we mentioned earlier, the manufacturer's warranty should protect you from any major damage or faulty mechanisms.

Do you drive under 15,000 miles per year?

If you answered yes, leasing should be on your radar. All lease agreements have mileage limits built into the contract. The mileage limit is the maximum amount of miles you're allowed to drive the car during the term. Typical mileage limits range from 10,000 to 15,000 miles, but they can be negotiated. The reasoning for a mileage cap is to limit the natural wear and tear of the car during the term. If you aren't driving across country every month, you should have no problem staying within the mileage limit.

Do you trade in cars frequently?

If you answered yes, leasing is probably right for you. If you're trading your car in every few years for another one, leasing may save you money in the long run. When you finance a car, your monthly payments are larger because you are paying for the entire cost of the car. Why would you agree to pay for the entire cost of the car if you only plan on driving it for a few years? When your lease is up, you have the option to lease another car, or buy the car you leased for the past three years. Or, if you wanted to end the lease early, you could lease swap. There are agencies that specialize in finding people who want to take over other people's leases. It only requires finding someone whose credit is good enough that your lender will approve the deal.

Do you prefer low monthly payments?

The greatest benefit to leasing a car is the low monthly payments it affords you. If you're not concerned about owning the car and you'd rather have low payments while you drive it (especially if it's a new Maserati), leasing is the way for you. The monthly payment depends on how much the car costs new, but it will always be less expensive than if you were to buy it. Keep in mind that making a large down payment (known as the cap reduction) at the beginning of the lease will drive down your monthly payments even more!

Car Leasing FAQs

What are the benefits of leasing a car?

Low monthly payments, low down payments (unless you want a lower monthly payment), the luxury of driving a new car and less maintenance hassle and cost.

Will I be charged if I go over my allotted drive miles for a leased car?

Yes. There is a charge for exceeding your drive mileage limit that varies depending on the type of car you lease and on the lease term length. However, you mileage limit can be negotiated, or you can purchase extra miles at the beginning of the lease term.

Am I responsible for repairs and maintenance on a leased car?

It really depends on your lease agreement. If you lease a new car, the manufacturer's warranty will cover any faults or major damages to the car. Also, some lease deals include maintenance cost into the monthly payment. However, if your lease deal does not have maintenance cost built into the deal, and the manufacturer's warranty is not active on the car, you are responsible for any maintenance costs.

What happens after my car lease term ends?

At the end of your lease, you have three options: you can purchase the car, return the car and lease a new car, or you can return the car and simply walk away.

Considerations for a great lease deal.

You're ready to start your lease, but before you begin you need to make sure you aren't overlooking any information that could hurt your wallet in the long run.

So, we prepared this list of things for you to consider to help you get the most bang for your buck!

Consider a Short Lease Term

Most lease terms are between two and four years, and for good reasons.

For one: The manufacturer's warranty usually runs out after three years.

And second: After four years, you're going to need new tires, and who knows what else on your car. Why would you buy new tires for a car you don't even own?

You typically want to sign a lease term that is consistent with the manufacturer's warranty, that way you are protected by it for the entire lease term. This will also ensure that you can trade the car in for a new one before it needs new tires, or any other additional maintenance work.

Gap Insurance is Important

 

If the car you lease is stolen or damaged beyond repair for any reason, the insurance company may not cover the full cost of the car. In this case, it would be your responsibility to pay the difference between how much the insurance company paid for, and how much the car was worth. If you don't have gap insurance, you'll have to pay this amount out of pocket. Gap insurance will cover this difference in cost for you. It might be wise not to sign a lease deal without gap insurance worked into the contract.

Lease Deals Have Mileage Maximums

Most lease agreements state a maximum number of miles you are allowed to drive the car during your term. The "drive maximum" is typically between ten and fifteen thousand miles, but this can be negotiated. If you have exceeded the drive maximum by the end of your term, you could be charged ten to thirty cents per mile over the mileage limit. This is why it's important for you to know your driving habits before you sign a lease agreement. Do you drive more than twenty thousand miles per year?

Lease Customers are Charged for Damages Over "Normal Wear"

At the end of your term, you won't be charged for the "normal wear", or normal depreciation, of the car. What is considered "normal wear" varies from dealership to dealership, but this would generally be the inevitable loss of tire tread, and maybe a scratch no larger than a business card. If you turn you car in with damages greater than normal wear, you could be charged extra for the repair costs. If you do damage your leased car during the term, the best option is to have it repaired yourself during the term.

Car Leasing Terminology: Don't let the lingo fool you!

You're almost ready to begin your lease agreement, but you want to make sure you're caught up on all the jargon. This document lists the most important terms you should know going into a lease agreement. No one should feel confused or unprepared when they are leasing. If you feel we've missed any terms, feel free to add them to the comments below, and we'll be glad to add them to the list!

Acquisition Fee

The acquisition fee is the amount that it costs the leasing company to arrange the lease agreement. This fee can be bundled into the monthly lease payment or paid up-front. It may also be referred to as the administrative fee.

Capitalized Cost

This is the actual price of the vehicle. It might be the MSRP (Manufacturer's Suggested Retail Price), or if it's a used car (you can lease new cars too), it might be the price that the dealership hopes to sell the car for.

Capital Cost Reduction

The capital cost reduction is a down payment that you can make at the beginning of your car lease. The larger your capital cost reduction, or down payment, the lower your monthly payment will be.

Drive-off

The drive-off is the total amount of money due when you sign the lease agreement. It's also known as 'due at signing'. This amount includes the cap reduction (down payment), acquisition fee, Department of Motor Vehicles taxes, other state taxes, a security deposit and the first month's lease payment.

Gap Insurance

Gap insurance protects you from having to pay the difference between the cost of the car's residual value and the total of any remaining lease payments due if the lease agreement were to end abruptly. For example, if the car was stolen or damaged beyond repair, the insurance company is only willing to pay so much for the vehicle. You would be responsible for paying the amount that they weren't able to cover. Gap insurance will pay this 'gap' in funds for you.

Mileage Allowance

The mileage allowance is the maximum amount of miles that you are allowed to drive your car during the term of the lease. If you have driven over the mileage allowance by the end of the lease, you could be charged for the extra miles. The rate you pay is predetermined, and it's typically between 12 and 15 cent per mile.

Money Factor or Rate

The money factor is essentially the interest rate of your lease agreement, but it's not expressed as an annual percentage rate. The number you see expressed as the 'Money Factor' must be multiplied by 2.4 to get to an estimated annual percentage rate. For example, a 1.35 money factor is a 3.24% interest rate.

Residual Value

The residual value is the estimated value of the car at the end of your lease agreement. The higher this price is relative to the capitalized cost (vehicle price), the more favorable it is to lease that car.

Security Deposit

The security deposit is the amount held by the leasing company in the event that obligations in the lease agreement are not met. Some dealerships may collect the last payment in lieu of a security deposit. Some lenders allow you to make multiple security deposits in order to discount the money factor on the deal.

Service Contract

The service contract is an agreement made between you and the dealership that provides the lease for your car. The contract states that the dealership will discount your car servicings as long as you agree to have your car serviced by them every time.

Subsidized Lease

A subsidized lease is one in which the monthly payment has been set by the car manufacturer. They are designed to offer you a lower monthly payment if you lease their car, as opposed to if you lease one of the manufacturer's competitors. This often requires that the manufacturer take on a certain degree of risk in the deal.