Leasing a Vehicle

If you lease a vehicle, you do not own it and it must be returned at the end of the lease term or purchased. So why would anyone lease a car? It gives you the experience of having a new vehicle with lower monthly payments than you could afford in a purchase situation. Individuals who enjoy driving new models every year or two are good candidates for leasing. Additionally, if you drive less than 12,000 to 15,000 miles per year, a lease may be an advantage over purchasing a vehicle. However, the mileage fees for exceeding the limit are high.

My monthly payment is higher than the dealer advertised in the newspaper. Why?

Advertisements promoting special leasing rates are often found in weekend newspapers. However, the lease contract itself always includes additional fees, which add to the advertised monthly payment. In addition to tax, title and license fees, some extra leasing fees may include:

  • down payment
  • a security deposit
  • bank fees
  • payment option fee if you purchase the vehicle

Call the dealership and obtain some basic fee information, then calculate your actual monthly payment. Because leases are calculated differently from purchases that are financed, go to the Web sites listed in the research section above and use their calculators to help you estimate a monthly payment amount.

Why do I want a short lease term?

The term of the lease varies and is negotiable. Generally, you will be leasing for the length of time that results in the most affordable monthly payments. However, your goal is to lease for the shortest length of time you can afford, to reduce the total payment amount.

The dealer said I could only drive the leased car for 12,000 miles a year. Can it do this?

Yes. The crucial factor in all leases is the amount of mileage you are allowed per year. The typical lease allows 12,000 miles per year. The charges per mile are steep if the permitted miles are exceeded. Further, you may be required to pay a penalty for driving the extra miles. Some leases allow you to "buy" miles at a lesser rate if it appears you are going to put more miles on the car than expected. Buying miles at the time you lease the vehicle can be less than half of what you would pay per mile for excess miles when the car is turned in.

I have to return my leased vehicle in "good condition." Exactly what does that mean?

Good condition means no damage to the vehicle other than typical wear and tear. In reality, the lease contract may allow the dealer to charge you for every tiny scratch. Make sure you understand what is allowed. Ask the dealer for a list, in writing, of items he considers typical wear and tear.

TIP: Get the vehicle's interior and exterior detailed before you turn it in. The $100 cost will be well worth it if accentuates the car's good condition.

What is "gap insurance"?

Gap insurance is included as part of the lease payments that covers the difference between the value of the car if it is damaged or stolen and what you owe under the remainder of the lease term.

Your insurance company will always place an actual value on the car that is much less than the amount owed under the lease. Without the additional gap insurance, you will be responsible for paying the gap. You are advised to obtain gap insurance if you plan to lease a car. If it is not part of your lease contract, ask the salesperson how you can purchase some.

Example: After a year you may owe $10,000 on the lease, but the vehicle is only worth $8,000. The insurance company will not pay more than $8,000 to you if the vehicle is totaled. Gap insurance pays the additional $2,000 to cover the balance of payments left on the lease.

What is the vehicle's residual value?

The purchase price for the vehicle at the end of the lease is its residual value. The residual value is not the actual value of the vehicle, i.e., the amount a bank would loan on the now used vehicle. The residual value is set out in the lease contract. The longer the lease, the less the vehicle is actually worth at the end of the lease. However, if you want to purchase it when the lease is up, you must pay the residual value.

Example: The BMW you leased for 3 years may have a residual value of $20,000 at the end of the lease but an actual value of only $15,000. You could only get a $15,000 loan to purchase the car.