Car Leasing Guide

To lease a car, you simply make a small down payment followed by monthly payments for the term of the lease. When the term expires, you return the car. (And, in most cases, start the process all over again, since you'll still need to drive.) But there are tradeoffs.

1. What is a Car Lease?

A car lease lets you drive a cool new vehicle without the large cash expense or loan hassle of actually purchasing it.

To lease a car, you simply make a small down payment followed by monthly payments for the term of the lease. When the term expires, you return the car. (And, in most cases, start the process all over again, since you'll still need to drive.)

But there are tradeoffs:

• You don't own the car when your lease expires. You've essentially been renting, not buying, it. So you don't have equity in the car to use toward the purchase of another vehicle.

• Over time, say 10 years, the cost of leasing several cars will likely exceed the purchase price of a new or used car.

• You will likely pay penalties on a lease if…
  • You exceed the number of miles in your lease contract.
  • You fail to keep the interior and exterior of the car in good condition.
  • You drive the car hard and inflict significant wear and tear on the car's performance and appearance.
  • You want to return the car before your contract expires.

2. Should You Lease?

Leasing is more beneficial than buying when you:

• Don't have the cash to buy the car.

• Want to drive a vehicle that's out of your purchase price range.

• Won't likely exceed the mileage cap in a contract-usually between 10,000 and 15,000 miles per year, the estimated national average.

• Will likely drive the car often enough to use up the mileage limit in your lease contract without exceeding it

• Plan to baby the car's exterior and interior, paying particular attention to avoid body nicks, pet rides and coffee and soda spills.

• Expect to lease another car when your vehicle's current contract expires.

If you expect to exceed the mileage limit or that the car's exterior will be excessively damaged or the interior will take a beating by babies or pets, then a lease probably isn't for you. The penalties can be costly. Exceeding the limit can run you 10 to 15 cents per mile, while your car will be inspected by the dealer just before the lease expires for excessive wear and tear to evaluate charges.

3. How to Lease

Leasing a car is less complicated than buying one. But to get the best deal on the car you want, you still need to go through a series of steps:

• Step 1. Choose a type- What kind of car do you want or need? A convertible? A sedan? An SUV?

• Step 2. Pick your models- Make a list of car types in your price range. You can reduce non-lease costs by including models with favorable gas mileage, high dependability, top safety features and low insurance premiums (ask your auto insurance agent for a list of vehicles).

• Step 3. Take a spin- Once you've narrowed your list to a few models, take each car for a spin. Pay particular attention to comfort, visibility, braking, steering, internal noise and shock-absorption. Don't mention you intend to lease (more on this in Step 6).

• Step 4. Ask about safety- During your test drive, ask the salesperson if the vehicle comes with antilock brake systems (ABS), electronic stability control (ESC) and head-protecting side air bags. All are valuable safety features.

• Step 5. Compare lease deals. When you return home, calculate the lease deals offered in ads by plugging the advertised charges into this calculator.

• Step 6. Talk price first- Once you're ready to return to a dealership to strike a deal, don't tell the dealer you plan to lease until after you've negotiated the purchase price. Most people who lease are unaware that their monthly payments will be based on the final price agreed upon

• Step 7. Negotiate up- Negotiate the final price of the vehicle up from the rock-bottom cost to the dealership. You can find out what new cars cost a dealer for $14 per vehicle at Consumer Reports. Your monthly payments will be based on the price you and the salesperson settle on between the dealer's low price and the manufacturer's suggested retail price.

• Step 8. Beware of gab. Your salesperson may try to distract you from negotiating the total price by getting you to close a deal by focusing on the relatively low amount you'll have to pay each month.

• Step 9. Paying the Lease. The larger your initial down payment, the lower your monthly tab will be. As with any bill, if you fail to make your lease payments on time, you face penalties. Turning in your leased car early, before the loan term ends will typically result in a penalty-unless you are trading in the car for another leased or purchased car.

4. Grilling Guide: Questions to Ask Before You Lease

What are the total lease costs?
They are likely to include a month's payment up front, a security deposit that's refundable when the lease ends, a non-refundable down payment, taxes, and registration and other fees.

Am I better off leasing or buying?
Compare the total cost of leasing with the cost of buying-if you were to extend your loan term to reduce monthly payments or purchase a used model instead.

How much will a vehicle cost to insure?
Call your auto insurance agent and ask for premium quotes on the car you want as well as a list of cars that cost the least to insure. Leased cars and purchased cars have similar insurance rates. They're based on the same series of factors. All the insurer knows or cares about is that you're driving the car and its risks for covering you financially. So if you're leasing or buying a red Corvette, your premium will certainly be higher than if you chose a silver Senata.

What are the lease terms?
Once you've agreed on the price, ask how many miles are offered on the lease as well as the terms of return and early surrender. Most dealers will slap you with thousands of dollars in penalties and report the deal-breaker to the credit bureaus as a "voluntary repossession," which can damage your credit score. Given some sense of what the costs associated with early surrender would be ideal.

What are the best lease deals now?
Car manufacturers offer lease specials all the time to move vehicles out of dealerships, especially at the end of new model years. Check local ads to be sure monthly payments listed include sales taxes and fees. Also, see if the lease requires a large down payment, bank fees and a security deposit. To determine what the latest lease deals are in your area, check Edmunds.com.