Learn About Leasing
When looking for a new car, you have two choices: buy or lease. The choice isn’t always clear whether buying or leasing will be the best financial choice for you. Dealerships and manufacturers often have incentives or subsidies that hide the true cost of each option. On top of that, leasing and buying have a different language. This can make it even more confusing when discussing payments and overall cost with a salesperson. Here's a breakdown of some of the most important words to know before leasing a car.
- Lessee: The person who is leasing the vehicle.
- Lessor: The company providing the vehicle for lease.
- Capitalized Cost: The price of the vehicle with all options and delivery fees. This is what you’d be paying if you bought the car outright. Often shortened to “cap cost.”
- Cap Cost Reductions: Any deals or specials that reduce the cost of the vehicle.
- Residual Value: The predicted value of the vehicle at the end of the lease. Maintaining this number is why mileage is so strict in a lease agreement.
- Money Factor: The method for figuring out the finance charges on a lease with monthly payments. Also called a “lease factor” or “lease fee.” It can be translated into a more familiar annual percentage rate by multiplying the money factor by 2,400.
- Mileage Charge: When you sign a lease, you agree to a maximum number of miles for the term of the lease. A charge is issued for each mile over the contract amount.
- Excess Wear-and-Tear: Many lease terms include this. Any damage to the vehicle beyond that of typical use is the responsibility of the lessee to repair.
- Gap Insurance: As with any vehicle, you have to insure your lease. If you are hit, it helps cover the cost to fix the dents. If the car is totaled, your insurance only covers the cost of the value of the car at the time of the accident. Gap insurance covers the gap between your normal insurance and what the lessor is now out.
- Amortization: Sometimes you can add items to a lease that might not add to the residual value of the vehicle. The cost of these items are added to the cost of the lease and amortized throughout the term of the lease.
Besides the terminology, there are other aspects of leasing that should be considered before signing on the dotted line. Here are a few of those considerations.
- Ownership: Someone else owns your car when you lease (think of leasing as renting). This means you can’t make any permanent changes or customizations without permission. If you swap out your wheels, you’d have to keep the originals and replace them upon the termination of the lease. This also means you won’t have a car to sell or trade in when you look for your next car.
- Mileage Limits: If you go over your mileage, you could end up owing quite a lot of money. Mileage costs can range anywhere from ten to thirty cents a mile. It might not seem like much, but every trip you take ends up costing you.
- Restricted Use: Some leases come with restrictions on where you can use the vehicle. Most notably, you can’t remove the vehicle from the United States without permission.
- Reduced Maintenance: Most likely, your lease will last as long as the warranty. That means you won't pay out of pocket if anything breaks. Wearable parts, brakes, tires, and fluids are all you're on the hook for.
- Sales Tax: Some states don’t have sales tax on a leased car because there is no sale to you—you’re paying for the privilege to use the vehicle. This could be a savings of a few thousand dollars.
In the long run, if it’s in your budget, leasing can be a viable option. There are plenty of calculators out there to help you find out exactly what the difference will be between buying and leasing. Hopefully with that help and the knowledge about the language of leasing, you will make the best choice for your life.