Auto Leasing: The Basics


Leasing a vehicle is like renting an apartment. The leasing company owns the vehicle, and you pay to drive it during the length of the lease. What you’re mostly paying for is the vehicle’s depreciation over the time you use it. Because you are not paying for the total cost of the car, your monthly payments are a lot less with leasing than with buying.

In tough economic times, it may seem attractive to choose leasing over buying because you’ll be able to save money in monthly payments and maintenance costs, which are included. The leasing market, however, has also changed with the economy. Thanks to the declining resale value of many vehicles, particularly domestic vehicles, leasing deals are more difficult to obtain and more costly. Chrysler ended all of its leasing deals in the U.S. in July 2008, and the other domestic automakers have dramatically reduced leasing programs.

You can still get a lease on some vehicles from European and Asian manufacturers, however, because they haven’t had the same problems as domestic automakers. These cars have retained decent residual values.

If you are considering leasing a car, here are some things you should know:

Leasing Fees
It’s important to know how your monthly payment is calculated so that you can make sure you are not overcharged. The monthly payment is made up of the depreciation fee, the finance fee and sales tax. The depreciation fee is calculated by subtracting the residual value of the vehicle from the Net Cap Cost (the negotiated purchase price + fees and taxes - credits) and dividing by the term of the loan. The finance fee is calculated by adding the Net Cap Cost and the residual value and dividing by the money factor (the expression of the interest rate). Adding the finance fee and the depreciation fee yields the monthly lease payment less sales tax, which differs by state.

There are also certain fees that are due at the lease signing. These are called “lease inception fees.” These fees differ between states, dealers and leasing companies. Typically, these fees include the first monthly payment, a refundable security deposit, the down payment (if required), sales tax on the down payment and registration fees.

Getting a Good Deal
Before discussing monthly payments, negotiate the sales price as low as possible. The sales price has the most bearing on what your final payments will be. Do your homework to find out what the dealer’s invoice price is and work up from there (not down from the MSRP) when negotiating. Be prepared to walk away from a negotiation if you are not getting what you want.

When you finally come to an agreement, make sure you read the leasing contract carefully. The federal Consumer Leasing Act spells out your rights to know the costs and terms of the lease including possible penalties and estimated value of the vehicle at lease-end. Once you have signed a lease, there is no grace period in which you can cancel the deal. So, do your due diligence upfront.

Lease-End Decisions
When the lease term expires, you have the option of returning the vehicle or buying it. Though your lease contract states a buy-out price, you may be able to get a better price. You might also be able to extend your lease. In some cases, you can use your vehicle as a trade-in towards new lease or purchase. Before making a decision, research the current market value of your vehicle. Also, consider how much you may have to pay in excessive mileage or wear and tear fees.

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