Car Leasing Guide

1. The Basics

Many people assume car leasing is a bad financial decision, but the truth is - leasing makes sense IF you meet the following three criteria:

1. You want a new car in 4 years or less
2. You drive 15,000 or fewer miles per year
3. You have excellent credit

If you answered "yes" to all three, then leasing is a smart choice. You just need to be very careful when entering into a lease; there's a lot of confusing terminology, and dealers will try to take advantage of your lack of knowledge.

Most car shoppers don't really understand how a lease works. Most assume it's similar to renting, but leasing is simply just another method of financing a vehicle. During a lease, you pay for the use of a vehicle (the depreciation), plus the interest payment - called the money factor.

When you lease a vehicle, you're actually doing business with a finance company - not the dealer. They purchase the vehicle from the dealer for the price you negotiate, then they lease it to you. Therefore, it's very important to negotiate the price of the vehicle as if you're buying it. That's the number one leasing mistake - and it can be very costly!

2. Pros & Cons

I don't recommend car leasing for most people, but in certain circumstances it makes sense. You need to weigh the pros and cons to determine if it's right for you.

Some of the advantages to leasing are lower monthly payments, no repair costs, no hassles selling the vehicle, and the luxury of driving a brand new car every few years.

For your immediate needs, you may want a certain type of vehicle, but know you'll need something different just a few years down the road. For example, if you just got married and are expecting to have kids, you may want to drive something fun for now, but will need a minivan later.

The downside to leasing is that it's more expensive over the long term. You'll need to watch the number of miles you drive; you'll need more expensive insurance, and you won't be able to customize the vehicle.

Once you get into a lease, it's expensive to cancel, so make sure leasing is the right choice for you before signing a contract.

3. Calculating the Lease

Comparing different lease deals can be confusing and cumbersome. You have all kinds of weird terminology such as cap costs, money factors, and residual values. But it's vital that you understand how a lease is calculated.

Luckily, there's a simple method which allows you to compare different lease deals rather quickly. You just need to figure out the monthly cost per $10,000 worth of vehicle.

If the monthly lease payment comes out to less than $135 per $10,000 worth of vehicle, then the lease deal is good. The best lease deals will hover around the $100 per $10,000 mark. You can read about this method in full detail here: How to Quickly Compare Lease Deals

Lease payments are made-up of three parts: depreciation - which is the largest portion, interest (called money factor), and taxes. It's actually pretty easy to calculate once you know how to do it, so don't feel intimidated. Dealers love confused car buyers, and there's nothing more confusing than leasing - so it really pays to be in the know on this subject.

4. Leasing Strategies

There are two things you really need to focus on if you want to get the best possible lease deal.

1. Always negotiate the price!
Many don't realize that you can negotiate the purchase price of a vehicle when leasing. This is called the capitalized cost, and it's a major factor that affects your monthly lease payment.
Be sure to use my Car Buying Method to negotiate the best lease deals.

2. Choose a Car with High Resale Value
When you lease a car, you're mainly paying for the usage of the vehicle. At the end of the lease, it's worth a lot less than when you first started driving it. You're responsible for paying this depreciation cost - which is the largest portion of a lease payment. By choosing to lease a car with high resale value, you minimize this depreciation cost.

The best lease deals are usually offered through the manufacturer in the form of subvented lease deals. When a manufacturer offers these lease deals, they typically lower the interest rate (called money factor), and/or increase the residual values to make the lease more affordable. You can see if a manufacturer is offering special lease deals by contacting dealers directly.

5. Fees, Taxes, and Other Costs

Leasing a car involves certain fees that you normally wouldn't have to pay if you were buying a car. A lot of people are confused when they hear "no money down" on a lease, thinking that it literally means you get to drive off with zero initial payment - this is not necessarily true.

The down payment on a lease only makes up one portion of the cash that's due at lease signing. With a lease, you'll also be required to pay an acquisition fee (usually $250 to $1,000), plus a disposition fee (usually $200 to $400). Sometimes you also have to provide a security deposit - which is refundable.

Don't forget you'll also have to pay fees such as dealer doc fee, tag, title, registration and license fees. If you buy the vehicle at lease end, you'll have to pay these same fees again.

Some people are surprised when they find out that insuring a leased vehicle is going to cost more - that's because leasing companies require you to get a higher level of insurance. In most cases, your state's minimum insurance coverage will not be enough, so keep that in mind before leasing.

6. Car Leasing Scams

Most dealers assume car buyers are clueless when it comes to leasing - which is unfortunately true. Most of the scams related to leasing take advantage of this confusion.

The most common scams have to do with raising the price of the vehicle - called capitalized cost. A lot of shoppers don't realize the cap cost can be negotiated down, so dealers get away with charging MSRP on a car that should normally be discounted thousands.

Other scams involve lying about interest rates (the money factor), or omitting information from the leasing contract. Some dealers can literally steal your trade-in with one stroke of a pen. You also need to watch out for fake fees - be sure to read the articles in this section carefully, so you don't fall victim to any of these leasing scams.