Leasing a car can provide definite benefits over car ownership, the biggest being the ability to trade in the car at the end of your lease for a new model. However, it's far too easy to get stuck in a lease that ends up being more expensive than purchasing a car outright. To avoid getting taken for a ride, keep these car leasing secrets in mind:
Shop Around When Leasing a Car
As with buying a car, you should always shop around when looking for a car to lease. Do the same homework that you would if you were buying the car because you'll have your leased car for two to five years. Consider gas mileage. Consider engine power. Consider leg room. Don't forget to figure in the cost of repairs, as some cars are more expensive to fix than others. Generally speaking, you don't need to think as much about long-term planning, such as long-term performance and effective life span. Honda Civics have a reputation for running forever, but that won't be as much of a concern if you're only leasing a car for two years.
Pay Attention to Terms When You Assume a Car Lease
The first number you need to consider when leasing a car is the capitalized cost. This is like the sticker price for your lease. The next number to consider is the residual value, or what the car would cost when the lease is over. When you lease a car, you and the lessee agree on how much value the car loses while you're driving it. If you lease a $23,000 car for three years, you may be looking at a depreciation charge of $7,000, leaving the car with a residual value of $16,000. By leasing a car, you're only paying for the use of the car while you have it; in this case, $7,000. If you negotiate the capitalized cost to $21,000, you'd have a residual value of $14,000, which is better if you choose to buy the car at the end of the lease.
The other number to pay close attention to is the money factor, which functions like interest in a traditional car loan. When dealers negotiate a lower capitalized cost or residual value, they often compensate by substituting a higher money factor. Talk numbers with the dealer before you negotiate price, and don't let him switch the money factor on you at the last minute.
Leasing vs. Buying a Car
Both leasing and buying a car have benefits and downsides. When you lease a car, you get to turn it in at the end of your lease and assume a lease for another car or buy a different vehicle altogether. You don't have to worry about long-term performance or being stuck with a vehicle you just don't like anymore. If you do like your leased car, you usually have the opportunity to purchase your car at the end of the lease, so leasing really does provide the best of both worlds. If you do plan to lease a car and purchase it when your lease is over, keep in mind that you'll be paying more over time than if you bought the car outright.
However, buying a car has benefits, too. When you're leasing a car, you're renting it, in essence. If you choose not to purchase the car at the end of a lease, you've got no equity to show for all the money you poured into the car lease. When you purchase a car, your car payments are actually building equity in your vehicle. You won't be penalized for going over the mileage limit, and you won't fall victim to exorbitant fees for obscure lease terms. If you keep your car after you pay off the loan, buying costs less in the long run than leasing because you'll own your car payment-free, while the leaser is making payments on a new car.
Be Prepared to Haggle Over Mileage
One way in which leasing a car can cost big bucks is if you exceed the annual mileage allowance of your lease. Most leases allow only 10,000 to 12,000 miles, and many drivers easily exceed this allowance, especially if you commute a long distance to work. Before you assume a car lease, pinpoint your driving habits to get an accurate estimate of your anticipated mileage and find out if you can work within those limits. If you need 15,000 miles per year, negotiate for a higher mileage rate. You'll pay a higher monthly fee, but you'll save money in the long run by not incurring the $0.21 per mile overage rate.
When Leasing a Car, Look Out for Hidden Fees
Always pay attention to the fine print, and ask for a complete accounting of all fees. When leasing a car, many dealers include early termination fees, acquisition fees for establishing a lease, mileage fees for going over your mileage allotment, wear and tear fees for returning the car in poor condition and even "upgrade" fees for options that your car may not have. If any of the fees don't make sense or seem too high to you, ask the dealer. If you don't get a satisfactory explanation, walk away from the deal. Plenty of other dealers are eager for business, so find one that deals with you honestly.
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