Auto Lease

 

What to Understand When You Get an Auto Lease

An auto lease is a popular alternative to a car purchase as it comes with a low down payment, lower monthly payments, and the ability to trade in the car for a new model after a few years. Before signing a lease, however, it’s important to know what to expect and how to get the best deal.

How a Car Lease Works

A lease is a contract in which the lease pays a portion of the actual cost of the car instead of buying the car in full. When you lease, you will get a new car and only pay a share of the car’s value over a specific number of years, which may be 2 to 5 years. Over the course of the lease, the portion you use is the amount of depreciation the car suffers.

Leasing a car is very different than buying; it can best be compared to a long-term rental. Auto leases tend to work best for people who like having the latest car, drive fewer than average miles per year, and either do not have a trade-in vehicle or do not have a large enough down payment to buy a car.

 

Getting a Good Deal on a Lease

Many terms of your lease are negotiable, including the down payment, interest rate, and other lease terms. When negotiating a lease, one of the first terms to settle is the down payment. When leasing, a large down payment is rarely required. You may qualify for zero down if you have excellent credit, in fact. It is possible to increase your down payment or bring in a trade-in vehicle, but it’s best to choose the lowest down payment necessary as you cannot have your down payment returned if anything happens to the vehicle.

It’s also a good idea to negotiate the capitalized cost or price of the vehicle as well. Before choosing a car to lease, check expected resale values after 3 and 5 years as these values help you anticipate the residual value of the car you want to lease. Your goal is the lowest possible capitalized cost and a high residual value as you will pay the difference when you lease.

There are several terms and fees to watch for on the lease contract. Capitalized cost reduction fee, for example, is another way of referring to a down payment. You should also watch for excess mileage charges. While 15,000 per year is standard, some manufacturers only allow 10-12,000 miles per year. Negotiate for additional miles before you sign if you believe you will exceed the mileage.

Lease contracts can be confusing, so it also helps to understand the terms you are reading on your contract. Gross capitalized cost is merely the car’s sticker price and it’s negotiable. Adjusted capitalized cost refers to the price after negotiations, trade-ins, rebates, and any down payment you make. Residual value is the estimate of what the car will be worth when you turn in the car at the end of the lease. The higher the residual value, the lower your payments.

The most confusing term for many leases is the “money factor.” This is simply the interest rate you pay. To compare it with a typical APR, multiply the number by 2400 to give you an idea of the cost of the loan over a year.

 

Benefits of an Auto Lease

There are many advantages to leasing. In fact, more new cars were leased in 2016 than at any other time of the last century with lease volume on the rise. Most people lease a new car because you can get more for your money without paying for the car’s full value. With a lease, you will always have a fairly new car that remains under warranty for your entire term of ownership.

Monthly payments on a lease also tend to be affordable. Monthly lease payments are an average of 23% lower than monthly car loan payments. This is because you do not pay back any principal; you are only repaying the amount the car depreciates over the term of the lease plus finance fees.

For many, leasing is a way to get the highest-quality car for the best possible price despite limited cash flow. When the lease is up, you can return the car to the dealer, keep the vehicle, or lease a new car.

There are drawbacks to consider, of course. With a leased car, you will never have equity and you do not actually own the car. It can be hard to get out of a lease early as there will almost always be a large penalty to pay. At lease-end, you can also face fees for going over your mileage limit, smoking in the car, stains, returning the car with worn tires, and other forms of damage.