Auto Loans Advice & Articles

The nuts and bolts of leasing a car

August 06, 2007

The basics of leasing a car are simple: You pay for a new car’s depreciation over the lease term rather than for the car’s full value, so you have significantly lower monthly payments – 30 percent to 60 percent, by some accounts – than if you purchased the same car.

But you’re more likely to get the best possible deal if you understand some of the nuts and bolts of leasing a car, such as:

• When you’re leasing, you should negotiate the price of the car just like when you’re buying a car. If you can get the price of the car down, the monthly lease payments should follow.

• Your payments will be based on the estimated value of your car at the end of the lease, or the residual value, which is set by the leasing company. Generally, you’ll have lower payments with a company that sets a higher lease-end value for the car, because the company is assuming less depreciation.

• You don’t usually have to make a down payment when you’re leasing a car, but you probably will have to make the first month’s payment right away. You might also have to make the last month’s payment and make a security deposit that will be refunded to you at the end of the lease, less any mileage or damage charges.

• You’ll pay interest when you’re leasing a car just like you do when you’re buying a car.

• You’ll pay sales tax when you’re leasing a car, but it’s based on the depreciation rather than the full value of the car. In other words, it’s less money than with a purchase. And, the tax is spread out over the term of the lease.

• You’ll be expected to perform regular scheduled maintenance when you’re leasing a car, and repair any body or other damage. You can take advantage of the car’s warranties for anything that goes wrong, as long as the term of the lease doesn’t exceed the term of the warranty.

• If you end a lease term early, it is likely to cost you money in early termination fees.

• Most car leases limit the number of miles you can drive without paying additional fees. The exact number of miles is set when you sign the lease, but it typically averages out to 12,000 to 15,000 per year. If you exceed the miles when you’re leasing the car, you’ll have to pay some hefty additional fees – usually 10 cents to 25 cents per mile -- when you turn the car back in.

• Your lease may include “gap coverage” that covers the difference between the value of the car and the total amount of payments you have made if it is stolen or totaled. Otherwise, you could be caught owing a lot of money on a car you no longer have.

• When you’re leasing a car, you may be able to get a lease that includes a purchase option allowing you to buy the car at the end of the term.


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