Do's and Don'ts When it Comes to Auto Leasing

Most consumers are confused when it comes to car leasing. Here are a few things to help you figure out what you should and shouldn't do if you're thinking about getting into a lease.

Leasing: Things You Should Do

1. Always Negotiate the Purchase Price

   Special lease deals from the manufacturer typically offer the lowest lease payments, but you shouldn't just accept the terms of those deals.

   These subsidized lease deals offer inflated residual values and/or lower money factors which result in a lower lease payment.

   Dealers have no control over the residual value or money factors, but they can negotiate the suggested selling price that goes along with the lease deal. Always negotiate the price (referred to as the capitalized cost) of the vehicle - even if you're getting a stellar overall lease deal.

2. Always Read the Fine Print

   When you're shopping for a lease, you'll come across some ads that seem too good to be true. That's because they are.

   When you read the fine print, you'll notice the ad only applies to certain undesirable trim levels, has a driving limit of 7,500 miles per year, and/or has a large down payment and security deposit. When you factor in all these additional costs, it's really not as great of a deal as you first thought.

3. Lease a Car with High Resale Value

   Vehicle depreciation (or the loss in value) makes up the largest portion of your lease payment. You should only lease cars that retain their value so you can cut back on the depreciation cost.

   See this example where we show how a more expensive car with a high resale value can actually cost less to lease than a cheaper car.

4. Lease Early in the Model Year

   Since depreciation is the biggest cost associated with leasing, you want to make sure to limit this as much as possible.

   One way of doing so is to lease soon after the new model is released (most new models come out between August and October). The longer you wait, the more depreciation has built up and the lower your residual value will be when you turn the vehicle in.

   An exception is if the car is a very hot seller and you can't negotiate a fair price. In that case, you should wait 2 or 3 months for supply to catch up with demand.

5. Get GAP Insurance

   GAP Insurance protects you in the event that your leased car is stolen or totaled in an accident.

   Since cars depreciate the quickest in the first 3 years, it's almost guaranteed that your vehicle will be worth less than what an insurance company will pay if it's destroyed or stolen. Gap insurance will cover this amount - which can total several thousand dollars in some cases.

   Many leases come with gap insurance included, but it's your responsibility to make sure you have it. It's generally a small cost, but well worth the peace of mind.

Leasing: Things NOT To Do

1. Do Not Terminate Your Lease Early

   This is the most expensive mistake you can make when leasing.

   Think of a leasing contract like a rental contract. If you rent a house, you usually sign a long term contract and agree to pay penalties if you don't hold up your end of the bargain - same thing with car leasing - only worse!

   Every leasing company charges an early termination penalty that can be in the thousands of dollars. There are less expensive ways to get out of your lease early, but none of them are really attractive.

   If you're going to lease a car, make sure you can commit to the length of the lease and follow through.

2. Do Not Put a Down Payment or Security Deposit

   When possible, you should always try to lease a car without a down payment (also called a capitalized cost reduction).

   In cases where a down payment is required, you can usually roll it into the monthly lease payment. The main reason you want to do this - if your car is totaled or stolen, the insurance company will provide a payout to the leasing company, but you will have lost your down payment.

   Remember - the vehicle is not owned by you - you're just "renting" it from a leasing company. Your insurance company has no obligation to pay you for any money you lost as a down payment.

   In addition to no down payment, you should also try to get the leasing company to waive the security deposit. Many will do so, sometimes with a slight increase in the money factor (interest rate).

   The reason you want to waive the security deposit is because some consumers never get it back at the end of the lease. Sometimes they forget about it, or the leasing company will take advantage of you by charging excessive wear and tear on the vehicle.

   If they don't have your security deposit, it puts you in a better negotiating position to fight excessive charges.

3. Do Not Accessorize a Leased Vehicle

   As much as you may want those fancy wheels or premium sound system, getting these kinds of accessories will hurt you financially when leasing a car.

   Leasing companies have a limit on the retail value they assign for each model. If you over-accessorize the vehicle, you're going to be paying for equipment that you'll only use for 3 or 4 years.

   You're essentially buying this stuff for the next person that owns the vehicle, so be careful which options you add to the vehicle.