Leasing a car can be a great alternative to other financing options if you are not ready to buy. It allows you to borrow a vehicle for a fixed duration with lower monthly payments. However, to avoid spending more money, it is important to do your homework and pay attention to the deal you are getting. Visit eAutoLease.com to learn more about car leasing and understand how it can benefit you.
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What is car leasing?
Car leasing is quite similar to renting a car for a contracted period but for a longer term. It is a long-term rental in which you make a deal with a lessee for a contracted number of months and a monthly payment.
During the lease period, you pay for the car’s estimated lost value, also known as depreciation, for the length of the lease. You are also paying the interest on the money borrowed to underwrite the lease. Consumers have the choice to sign a close-end or an open-end lease, depending on their circumstances.
Here is a guide outlining the process, benefits, and options for car leasing to help you find a good deal.
Important facts you need to know before leasing
The most significant factor you need to focus on when leasing a car is the number of miles you drive annually. Signing a lease binds you contractually to stay within an established mileage limit. The limit or the mileage cap is averaged over the number of years in the agreement.
Depending on the lease, agreements range from 10,000 miles per year to as many as 15,000 miles per year. Regardless of the limit, the leasing company will penalize you for every mile above the limit. You need to know how many miles you drive and check out the per-mile penalty before signing the contract.
Read more: Wannabe Car Owners Can Lease a Tesla, but Is It Worth It?
Money factor in leasing – what is it?
For financing a car, you must also pay for the money you borrow. It is known as interest, which is shown as a percentage (3.0%, 4.5%, and so forth). You must know the rate of interest you will be paying. The higher the interest rate, the higher your monthly payment.
When you lease, you also have to pay for the money the lessor used to buy the car. In leasing, the interest is called the money factor. It is calculated and displayed differently (0.0010, 0.0023, and so forth). The simplest way to understand the money factor is to multiply it by 2,400.
Is it possible to negotiate the price of a leased car?
Yes. It is possible to negotiate the price of a leased car, and it is highly recommended as well. Just as you negotiate when buying a car, you can also bargain with a lease and get the best price.
However, if you accept a manufacturer’s incentive or dealership deal, you may not get a chance to negotiate other items in the vehicle lease. Dealers are more willing to negotiate the price of a vehicle lease before a new model arrives or before the end of the model year for the car you want to lease.
How to reduce monthly lease payments?
You can keep the monthly lease payments down by:
- Reducing the capital by negotiating a lower vehicle purchase price
- Putting down additional money or in case of a trade-in, negotiating for a higher trade-in value
Negotiating points in a lease – what are they?
- The vehicle purchase price that is framed as the capital cost
- The down payment
- The trade-in value
In addition to knowing what you can negotiate in a lease, there are other factors you cannot negotiate when leasing a car. Lessors rarely budge on them so don’t expect much when it comes to negotiating a lease.
Who is responsible for maintaining a leased car?
Once you have leased the car, you are responsible for car maintenance. You are expected to follow the maintenance schedule as outlined in the owner’s manual. Fortunately, many vehicles come with some sort of free maintenance plan.
An agent from the leasing company inspects the vehicle for any damage beyond normal wear and tear when you return the car, at the end of the leasing period. You will be charged if the wear and tear is more than normal or as discussed in the agreement.
Read more: Lease Takeovers: 5 Things to Know Before You Take On Someone’s Lease
Who is responsible for insuring a leased car?
You are responsible for insuring the car you have leased. The leasing company will determine the type of car insurance coverage you must get. Check out how much you will have to pay and contact your automobile insurance agent to establish the annual premium before leasing.
Is it possible to get out of the lease early?
Remember, a car lease is a binding contract. The leasing company sets the monthly payments based on the time specified in the agreement. If, for any reason, you want to get out of this agreement early, you will have to pay a penalty.
You may be asked to make a balloon payment to cover the remaining outstanding payments. You just cannot return the leased car or sell it to pay off the leasing company. As it is not your car, you do not have equity in it.
Current market conditions make it possible to negotiate with a dealership if you are planning to buy a car. The dealerships may be ready to make a deal to help you get out of your lease early as the used car supply is tight these days. You may also find brokers and individuals willing to take over your lease.
Credit and car leasing – how credit impacts car leasing?
A leasing company checks your credit score and history to determine your eligibility for a lease. If your credit score is 501 to 660, you may be able to get a lease, but you will have to come up with a heavy down payment. Also, you will have to pay a higher-than-average interest rate if your credit score is low.
Leasing a car requires better credit than financing. It is because you only lose down payments if you stop making the lease payments. You will not have any equity in a lease vehicle as you are renting it. As leasing companies know you have little to lose, they choose the lessees wisely.
Whether you lease a car or buy and finance it, you have to make a monthly payment. Financing requires a down payment but with leasing, you may have to put up a security deposit, the first month’s lease payment, a fee for arranging the lease, or a down payment. There are also car title and registration fees.
Difference between leasing and buying a car
Leasing and financing a car have their differences. While each comes with a set of advantages, it has its downsides too. Read on to know about the difference between leasing and buying.
Leasing vs. buying
- The monthly payments for a leased vehicle are always lower than financing payments for the same vehicle.
- You have to pay a hefty fine if you want to end the lease before time while there is no such thing when you finance a car
- You have to return the car to the lessor at the end of the lease as it is not yours. If you have purchased a car, you can sell or trade it in for another vehicle anytime, as long as you satisfy the loan balance.
- Exceeding the pre-set annual mileage in a lease can cost you a lot of money, but there is so such issue with financing. The car is yours, and you can drive it as much as you can, without worrying about mileage limits as there is no limit.
- A leased vehicle is not yours, but the vehicle you buy is yours. When the loan gets paid, you can keep, sell or trade the car as you wish.
Pros of leasing – why should you go for it
- Low monthly payments – As you are only paying for the estimated depreciation while driving the car and not making a purchase, monthly payments are lower than financing payments. It is the biggest benefit of leasing and draws people towards it.
- New vehicle after some time – Leasing offers you a chance to drive a new car every two or three years without any strings. A side benefit of driving a new car after every few years is you probably will always have a vehicle protected by the factory’s new car warranty, which may get you free maintenance warranty for some time. Also, you can get a car with the most up-to-date technological advances and safety features.
- You walk free at the end – As the lease ends, you can walk away without worrying about the hassle of selling the car or negotiating its value as a trade-in.
- Buy the car for less – If you are still interested in driving the same car once the lease ends, you can buy it. The leasing company estimates what the car would be worth at the end of the lease, also known as the residual value. If this residual value is underestimated, you could cash in by buying the car for far less than the current market value.
- Lease a used car – Some dealerships offer leases on used cars, while some manufacturers offer extended used car leases on vehicles up to 10 years old.
Cons of leasing
Along with benefits, leasing also has some downsides.
They include:
- Leasing is just like long-term rental and the monthly payments you are making are the rent for driving the car. As you have not purchased the car, you will never build any equity. A car roughly loses 35 to 40% of its value in the first three years. At the end of the lease, you won’t have anything to show for the payments you made during these years.
- Every lease comes with a mileage limit, and every mile you drive is counted. It could be an average of 10,000 or 12,000 per year. You will end up paying a penalty at the end of the lease if you use excess miles.
- You will be responsible for damage to the car beyond normal wear and tear. The leasing company will expect you to pay for the repairs if they are not included in the lease or warranty of the car.
- If you want to cancel the lease early due to any reason, you will have to pay hefty penalties. The leasing company will ask you to make a balloon payment equal to the outstanding payments on the lease if you want to get out of the lease before time.
Key leasing terms you should know
Here are some formal leasing terms you should understand before delving into the world of leasing:
- Acquisition fee – This is the fee charged by the lessor for setting up the lease. This fee varies and can be as much as $1,000. It is best to ask about the acquisition fee before signing any lease. It cannot be negotiated away but can be folded into monthly payments.
- Allowable mileage – Also known as mileage cap, it is the average number of miles you are allowed to drive per year. You will be paying a penalty for excessive miles you drive.
- Capitalized cost – It is the agreed-on selling price of the vehicle along with any fees that are included in the monthly payments.
- Capitalized cost reduction – Also called cap reduction, it is any factor that lowers capitalized cost. It is usually in the form of a down payment or trade-in allowance.
- Depreciation – The lost value of the vehicle throughout the lease is the depreciation.
- Disposition charge – It is a charge to clean and dispose of your car as the lease ends.
- Drive-off fees – They include fees and deposits to begin the lease such as sales tax for lease transactions. Check with the lessor what fees are included in drive-off fees. It may be possible to negotiate some of these fees.
- Early termination – It is breaking a lease contract before the end of the leasing period. It can get out of a lease before time and pay a sum of money equal to the remaining payments.
- Gap insurance – some leases automatically include gap insurance in the capitalized cost. Your insurance may not cover the entire loss if the car is stolen or a total loss. Gap insurance pays for what car insurance doesn’t pay.
- Lessee – The party leasing the car.
- Lessor – The entity financing the lease. It could be a bank, a credit union, or a car manufacturer’s financial department.
- Money factor – In a lease, the money factor affects the monthly payment. The higher the money factor, the larger the monthly payment.
- Payoff amount – It is the amount that you will have to pay to buy the car at the end of the lease. It is the residual amount minus any security deposit.
- Term – The length of the lease.
How to lease a car
Research is the key to leasing a car. The more you look, the better deal you will get. Some steps to leasing include:
- Check your credit score – Having a good high credit score can help you secure a lease easily with lower monthly payments. A credit score above 600 is considered good. If your credit score is low, you need to make a larger down payment to get approved.
- Calculate the figures – Check out how much cash you can pay upfront. Some deposits and fees must be paid when you sign a lease, and many are not negotiable. In some cases, a lessor may also ask for a down payment.
- Determine your average annual mileage – You will have to choose an average yearly mileage cap of 10,000 to 15,000 miles. Determine your average annual mileage depending on your driving habits. You will have to pay a penalty if you exceed the mile limit.
What to look for in a vehicle to lease?
When leasing a vehicle, you must make a good choice and find a car that retains its value over time. Some brands of vehicles retain much of their value as they grow older, as compared to others, so it is necessary to choose wisely.
Value retention is essential when you buy a vehicle, but not until you sell it or trade it in. Value retention in a leased vehicle helps immensely because the more value a vehicle is expected to retain, the lower will be the monthly payments.
Is it possible to lease a used car?
Yes. You can lease a used car. Many dealerships offer leasing incentives on their certified pre-owned (CPO) vehicles. These are gently used newer model cars with factory warranties and other benefits.
How long does a car lease last?
Traditional leases last 24 or 36 months, but you will find special leases of odd durations. Instead of 36 months, a car manufacturer may offer 39 months. You can also find leases for longer terms, such as four or five years. Like financing, the longer the lease term, the lower the monthly payment you will get.
Is it possible to extend a lease?
Yes. If you have not found the replacement vehicle and have reached the end of your lease, most lessors are happy to extend the lease on a month-to-month basis or for a fixed number of months. As before, you will continue to make monthly payments. Also, if you are extending the lease for months, you may have to sign a new contract.
Leasing a car helps you temporarily own a car without actually going through the process of buying it. Make sure to understand the leasing terms and conditions and go through the contract to enjoy driving the vehicle you always wanted. eAutoLease.com gives you a chance to learn more about leasing and browse through all the available vehicles to make the best choice depending on your budget.
