Car leasing deals are becoming very popular. For starters, you can often save between 20% to 30% on a lease as opposed to a car loan. Here is everything you need to know about how to lease a car.
What Is a Car Lease Agreement?
A car lease agreement is a contract between you and the car lease provider, which allows you to drive a new car for a set period of time specified in the lease agreement in return for a monthly premium. The lease term is often between two and five years with mileage restrictions.
Difference Between Leasing and Buying a Car
When you buy a car, it becomes your property. In contrast, you won’t have any car ownership with a car lease agreement because you are only renting the car for a period of time. In other words, when buying a car, you are paying for a physical product. When leasing a car, you are paying for the use of the lease provider’s vehicle.
Advantages and Disadvantages of Leasing a Car
To decide whether to lease a car, it’s important to understand the potential pros and cons.
- Lower monthly payments
- Lower maintenance costs
- No car resale responsibilities
- Tax advantages for business owners
- No car depreciation value to worry about
- Option to buy the car at a good price once the lease is up
- Early lease termination penalty fees
- Spending a substantial amount of money for a car that you never own
- Mileage limits
- Exceeded mileage limit penalty fees
- Costly full coverage and gap insurance requirements throughout the lease duration
How To Lease a Car
Leasing a car should be a fairly simple and easy process as long as you know what to expect.
Familiarize Yourself With Car Leases
The seven different types of leases are as follows:
- Closed-end leases: This is the most common type of lease, with standard terms and a set return date.
- Open-ended leases: This lease gives you an open period return window, which can be as much as six months.
- Subvented leases: This closed-ended lease comes with interest rate discounts and car price rebates.
- Single-payment leases: This lease requires you to pay the full lease amount upfront, saving you money on interest.
- Used car leases: This lease is only valid for used cars, which come with reduced monthly premiums.
- Short-term leases: This lease has a maximum term of two years.
- Long-term leases: This lease can extend to over four years.
Understand the Contract Language
A lease agreement is a legal contract that can contain loads of jargon. Make sure you understand any car lease terminologies in your contract before signing the agreement. Here are some example terms to learn:
- Capitalized cost: This is the retail value of the car and will determine your monthly lease premiums. The capitalized cost, or “cap cost,” should be negotiated exactly the same as when buying a car. The lower the cap cost, the lower your monthly payments.
- Capitalized cost reduction: Also referred to as “cap reduction,” this refers to anything that lowers your cap cost, such as down payments, rebates, or trade-in allowances.
- Adjusted capitalized cost: Also referred to as net capitalized cost, this is the amount calculated when the cap reduction is deducted from the cap cost. The leasing company also uses this to calculate your monthly payments.
- Acquisition fee: This is a non-negotiable lease arrangement fee charged by the leasing company. You can add it to the cap cost to spread the fee into your monthly payments. This fee is usually between $400 and $750, but not all lease providers charge this fee.
- Depreciation fee: Because the car depreciates in value over the lease period, a depreciation fee is calculated into your monthly payments. These fees can vary drastically between car brands. For instance, BMW and Mercedes cars depreciate at lower rates.
- Residual value: This is the amount the car is worth at the end of the lease term.
- Money factor: This is the interest rate you pay. There are several online resources that can help you convert the money factor into actual interest rates.
- Lessee and lessor: If you lease a car, you are the lessee and the leasing company is the lessor.
- Disposition charge: This fee is used to get the car ready for sale after the lease is up. The disposition charge is typically $250.
Make Sure You Meet the Application Criteria
Some criteria leasing companies may ask you to meet include:
- A good credit rating
- Proof of affordability, such as payslips or bank statements for the past two years
- A valid driver’s license
- Two years’ proof of residency at the address on your driving license
Calculate Your Affordability
First, calculate your disposable income by subtracting all your taxes and fixed expenses from your gross income. Then decide how much of your available disposable income you want to spend on the monthly lease premium. Remember to take the money factor, insurance, and all other fees you may be charged during the lease term into consideration.
Pick a Car, Visit Dealerships, and Start Test Driving
With your budget in mind, decide on the most suitable car and ask for a test drive, just like you would when buying a car.
Put Your Negotiator Hat On
You can and should negotiate lease terms the same way you would when buying a car. Your aim should be to get your cap cost, mileage limit, money factor, and maintenance responsibilities as low as possible. The lower these are, the less money you will pay monthly during the lease term.
Make a Note of the Return Date and Policy
The final step is to ensure you understand the return policy and time frame. Get a copy of the fair wear and tear guidelines and stick to them during the lease term. Check the actual wear and tear against the guidelines to avoid potential repair charges when returning the car.
Overall, leasing a car is an ideal option for anyone looking for lower monthly payments, minimal commitments, and no resale frustrations. Best of all, you get to drive a new car every few years.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.