Get the right terms for the best lease
Lease agreements are written to protect the finance company or bank that's buying and then renting the car to you, not the consumer.
That's why it's important to understand all of the charges and penalties that could turn a great deal into an expensive mistake.
Here are the most important lease terms that every savvy buyer should know before signing on the dotted line.
Leases impose acquisition fees in the same way that mortgage lenders charge points. But finance officers don't always spend much time talking about them until you're so committed to the deal that you'll go along because you're too eager to start driving your new car.
This is the price of the car, plus any acquisition fees or other charges and minus manufacturer rebates or other discounts. Make sure you understand and agree to everything that goes into calculating the cap cost.
This is what the leasing company estimates the car will be worth at the end of the lease. How much you pay for depreciation is determined by subtracting the residual value from the capitalized cost. Regardless what the actual value of the car is after two years, the residual price is what you can buy the car for at the end of your lease.
Open- and closed-end leases
Make sure you get a closed-end lease. At the end of a closed-end lease, you hand over the keys and walk away. With an open-end lease, you could wind up responsible for any difference between what they estimated your car would be worth at the end of the lease (the residual value) and what it is really worth.
That can cost you a great deal of money. With an open-ended lease, the leasing company might lure you into the deal with a low monthly payment based on an overly optimistic residual value, then stick you with a big balloon payment when you return the car.
Monthly lease payments cover:
- Depreciation on the car
- Interest on the loan the leasing company used to buy the car
- And in most states, sales tax on the amount you're paying for depreciation.
Because lease payments are made in advance, your first payment will be due the day you sign the contract unless you get a special lease deal. Some automakers are offering leases that waive the first payment, or even several, although those deals usually are for premium cars.
This covers the cost of selling or getting rid of the car at the end of your lease. Know what it will be and ensure that the fee is waived if you decide to buy the car rather than return it.
One of the most important parts of every lease is how many miles you'll be allowed to put on the car while it's in your possession.
Some leases can tempt with low monthly payments because they allow only 10,000 miles per year. But try not to sign up for anything less than 12,000 miles per year or try to negotiate for that amount for the same payment.
If you drive a lot or have a long commute, 15,000 miles of annual driving might be even more realistic.
Remember that the more you drive, the more you're depreciating the car. So higher mileage limits usually lead to higher monthly payments.
Your contract will spell out extra charges for:
- Driving more miles than you were allowed.
- Returning the car with any damage beyond normal wear and tear
- Returning the car and getting out of the lease early.
It's critical to understand what kind of damage the leasing company looks for when you return the car and how much it will charge for everything from coffee stains on the seat to a dented door or deeply scratched paint.
Some leases require a security deposit that's usually equal to or a little larger than your monthly payment. At the end of the lease, any penalties and the disposition fee are taken out of your deposit. You'll get back whatever's left.
The security deposit and the acquisition fees may be negotiable, particularly for repeat customers.
This covers the difference between the money you'd get from your insurance company if your car is totaled in a wreck or stolen and the amount you'd owe the leasing company or bank.
Your car would be worth less than when you first drove it off the lot because of depreciation and wear and tear. When the insurance company cuts a check after a loss, it may not be enough to pay off what you owe.
Gap insurance fills the gap so you don't have to make up the difference out of pocket. Make sure you get this coverage as part of your lease.