Leasing

Leasing is a popular way to acquire a car. In fact, recent figures suggest that more than one of every five new cars is leased. And it’s easy to understand why. Leasing allows most people to drive a more expensive car at a lower monthly payment than they’d make on a car loan. And people who lease cars tend to replace them about every two to four years, so they’re always driving a relatively new, reliable car.

But leasing isn’t right for everyone. At the end of a lease term, you will have made thousands of dollars’ worth of payments, but you don’t own a car. Car leases may restrict how many miles you can drive without incurring additional fees or charges — usually no more than 15,000 miles per year — and require regular maintenance. And if your financial situation changes and you have trouble affording your payments, you may have difficulty getting out of an auto lease before it ends.

On top of all of this, auto leases are more complicated documents than sales contracts — and car dealers are not required to disclose how they calculate lease payments. Consequently, many people wind up paying more than necessary to lease a car.

Negotiating a lease

When you lease a car, you pay for using it for a certain period, typically 24, 36 or 48 months. You also agree to pay for insurance, sales taxes (usually spread out and paid along with your monthly payment), repair, maintenance and registration. The leasing provider retains the car’s ownership and title.

Although you work with a dealer when leasing, the dealer doesn’t actually handle the lease — banks, credit unions and car manufacturers’ finance divisions arrange the actual leases. The car dealer sells the car to one of these organizations, which then leases it to you as a lease provider. You are generally not required to use the lease provider that your dealer suggests or chooses for you. Rather, you can usually arrange for lease financing with your own bank, credit union or independent auto leasing company.

Capital costs

Your monthly lease payment is usually determined by a complex formula that starts with whatever original sales price you and the car dealer agree on, called the car’s capital cost, or cap cost. The cap cost is then considered along with the car’s residual value, or what it will be worth when the lease ends, and financing charges, called the money factor or lease factor. Unlike regular interest payments, these costs are expressed as a decimal, such as 0.00297, which is equivalent to a specific annual interest rate, in this case 7.13%. The lower the cap cost, the lower your monthly payment. You can negotiate cap cost with your dealer — and indeed you should, in order to save yourself money — but not money factor, residual values or other related fees. To get cap costs down, you might consider using a factory-to-customer rebate if one applies, a down payment or trade-in value from your old car, if you have one.

At the start of your lease, you usually pay certain inception costs to the dealer, including your first month’s payment, a security deposit, an upfront charge and various miscellaneous fees.