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Negotiating a Lease
Just a few years ago, many consumers discovered leasing allowed them to drive status symbol cars for little money up front and relatively low monthly payments.
Before you consider leasing, ask yourself two questions: First, do you expect to keep the car for more than three years? Second, do you drive more than 15,000 miles a year?
If you answered "yes" to one or both of those questions, you're probably better off buying than leasing.
Although agreements can include purchase options, you're not building equity and the car's ultimate price is determined when you sign the lease, either by negotiation or by predetermined tables. (Most leases also include penalties for early termination.)
And nearly all leases charge 15 cents or more for each mile over an annual allowance (usually 12,000 to 15,000 miles) and require you to pay for "excessive wear." If you don't want to drive a new car every three years, if you put more miles on a car than average, or if you're harder on a car than average, a lease isn't right for you.
However, a lease can have advantages. It requires little or no down payment. Monthly lease payments are usually lower than loan payments would be on the same car, because you're not paying off principal or building equity.
But leasing is merely another form of renting. At the end of the lease, you return the car to the lessor (although some leases give you the option to buy). During the lease, you must pay for gas, oil, upkeep and all repairs not covered by a warranty. The lease agreement should spell out who provides insurance coverage; check with your insurer to be sure you're covered for the value of the car.
Getting a Good Deal
If you shop for a lease, the "sell price" of the vehicle - the negotiated price upon which the lease is based - is critical. Even though you're not buying the car, you should negotiate the sell price. Accepting the manufacturer's suggested retail price (MSRP) can be as expensive a mistake in leasing as it can be in buying.
Research the invoice price of the vehicle you want and negotiate from there. Although a number of factors determine a good sell price (for example, the competition among local dealers or the availability of the model you want), a sell price 2-4 percent above dealer invoice is generally regarded as fair, with the higher end of that range reserved for luxury cars. Be sure to ask about discounts, either from the factory or the dealer.
The higher the residual value (see Common Leasing Terms below) of the vehicle, the lower your monthly lease payments. When you compare quotes from various dealers, compare the residual values upon which the quotes are based.
Heading Off Headaches
Government consumer agencies have noted a big increase in the number of consumer complaints about auto leases. Among the most frequent complaints are misunderstandings about substantial penalties for ending the lease early, high charges for excessive wear and tear at the end of the lease, and "disappearing trade-ins" (the lessor promises a high trade-in value for the consumer's old car, but it does not appear on the written agreement).
To head off these and other problems, read the leasing agreement carefully, and get all promises in writing. Pay particular attention to the following:
- High fees for the lessor preparing your car for sale at the end of the lease (called "disposition charges").
- Low mileage limits of less than 12,000 to 15,000 miles per year.
- Vague definitions of "excessive wear." You might have to pay for stains and tears in the interior or dings and scratches on the finish. Make sure the contract spells out the requirements in detail and save all your repair and maintenance receipts.
- The addition of credit insurance or other kinds of insurance without your explicit consent.
- Any charge to include an option for you to purchase the car at the end of the lease.
- High down payments or security deposits. Many leases require a security deposit, which should be slightly more than one monthly payment.
Under new federal rules, dealers must provide consumers with a document clearly spelling out the basis for calculating monthly payments, the total payments, the penalties for ending the lease early and other relevant information.
Common Leasing Terms
Closed-end Lease
A contract in which you return the vehicle at the end of the leasing period; also called a "walk-away" lease. Although you owe nothing unless the vehicle is badly damaged, the monthly payments are usually higher on a closed-end lease because you "walk-away" without purchasing. Compare with "open-end" lease.
Open-end Lease
A contract in which you and the lessor, at the beginning of the lease, estimate what the vehicle will be worth at the end of the lease. If it's worth less than the estimate (due to excessive mileage or damage), you owe the difference. Because you assume some risk, an open-end lease generally offers lower monthly payments than a closed-end lease.
Capitalized Cost
The negotiated price of the vehicle, plus the acquisition fee and extras, minus a down payment. Sometimes referred to as "cap cost."
Acquisition Fee
The up-front fee you pay to the lessor to cover administrative costs, similar to points on a loan.
Capitalized Cost Reduction
Down payment (either as cash or trade-in).
Residual Value
What the car will be worth when the lease at the end of the lease term. Dealers either use charts to determine this amount or negotiate it with you at the beginning of the lease.
Depreciation
The amount a vehicle's value declines over time. This is calculated by subtracting the residual value from the capitalization cost. You pay for it every month as a "depreciation payment," which is the total depreciation divided by the number of months in the lease.
Lease Charge
Interest you pay on both the cap cost and the residual value.
