How to Lease a Car and Why You Should
If you’re in the market for a new car, SUV, van or truck you’ve probably seen lots adverts for vehicle leasing, but do you know how to lease and car or why you should seriously consider it? In this article, I’m going to tell you how to lease a car, how leasing works, and why I think it’s the best way to buy new cars.
How to lease a car
All you need to do to lease a car is find the one you want, make a small down payment that’s typically lower than you’d pay to buy, and then make monthly payments for the term of the lease you’ve chosen. At the end of the stated term – usually 2, 3 or 4 years – you simply return the car to the leasing company.
To lease a car is just like buying a car or financing one with a loan in many ways. You choose the car you want, agree on a deposit and monthly payments determined by the length of the agreement and the number of miles you intend to drive during the term. When you come to the end of the agreement you simply hand the vehicle back to the leasing company.
Additional payments can arise when the car is handed back for a couple of reasons. If you’ve done more than the stated mileage in the car you’ll have to pay an additional amount of money per mile, which could be something like 25 cents a mile. Also, if the condition of the vehicle when it goes back is worse than stated in the “fair wear and tear” policy of the lease, you’ll have to pay to have it restored to an acceptable condition.
What cars can you lease?
You can lease any make or model of new car that’s available, so the only restriction is what cars you can afford to lease.
The first thing you have to do when you decide to lease a car or any other type of vehicle is to decide on your budget, and this will also help you decide which cars you then want to check out. There’s no point going to a Ford dealer to test drive an F-150 Raptor or to a Mercedes dealer to try out the latest S-Class if your budget is $300 per month.
Work out how much you can afford to spend and then search for vehicles on the web that can be leased for that sort of budget. You can use a site like Edmunds to help you find out what you can lease for your budget, but remember the headline rates quoted might have been calculated with a large deposit to make the monthly payment look low.
Can you ever own a leased car?
Some leasing agreements allow you to buy the car at the end of the term by paying the leasing company’s valuation of the vehicle, but a lot of lease agreements do not have this option.
A more pertinent question might be why would you want to buy a car you’ve leased? If you really, really like the car and you’re coming to the end of your lease term, why not get another one the same but brand new again? A brand new one may have had a facelift, it might have added new features, and you’ll be starting again with a full manufacturer warranty so you won’t have to worry about repairs.
Can a car lease be terminated early?
You can terminate your lease at any time but you must inform the leasing company before stopping the monthly payments. You will then be liable for a termination fee, which is usually 50% of the outstanding payments. If you’d like to know more about what you can do if you can’t afford your monthly leasing payments anymore, check out another article I’ve written specifically about that subject.
Nobody knows what the future holds when they take out any sort of finance agreement lasting several years, but it’s always a good idea to know what you can and can’t do with a car lease before you commit to one.
Can a car lease be transferred?
Leasing companies will sometimes allow you to transfer your lease to someone else, but in some cases, they might only allow the transfer of the lease as long as you remain named on the agreement. If you’re coming towards the end of the lease term and only a few payments are outstanding, the leasing company is unlikely to agree to a transfer in those circumstances.
The person you transfer the lease to can be someone you know or a family member, but there are some websites where you can advertise your lease for transfer to increase your chances of finding someone to take it over by appealing to a wider audience. If you do go down the internet route and end up transferring to a stranger, make sure the transfer is a full and complete one and doesn’t leave you responsible if the new lessee defaults on future payments.
Can car lease prices be negotiated?
Car leases can be negotiated just like any other form of vehicle purchase. You can negotiate the capitalized cost (the price of the vehicle), the money factor (interest rate), mileage cap, the deposit, and your trade-in value.
Things you will not be able to negotiate are the residual value, disposition fee, purchase option fee, acquisition fee, and registration and sales taxes. The residual value, or how much it’s estimated the vehicle will be worth at the end of the lease, has a huge bearing on how much your monthly payment will be. Unfortunately, residuals are usually set by an independent body such as the Auto Lease Guide (ALD) so manufacturers, dealers, and leasing companies don’t stray from these expert predictions.
Can you lease a car with bad credit?
You can lease a car if you have bad credit, but your options will be severely limited and the cost is likely to be much higher than a traditional lease for those with good credit. If you desperately need a car and have bad credit, you might be better off looking at financing a used vehicle instead. If you have bad credit but you absolutely have to have a brand new model for some reason, be prepared for high payments and a severely limited range of options.
Does car leasing include insurance?
Some types of insurance coverage might be included as part of your car lease package. It’s common for leasing companies and/or dealers to include products like gap coverage or loan protection insurance as part of the lease, but you should always be made aware of anything included and whether you can decline it if you wish.
The practice where products like gap cover, tire insurance, and paint protection are included in a price you are quoted is sometimes referred to as assumptive selling. If you want to know more about this and how to avoid other sales techniques designed to get more money out of you, check out my car sales techniques exposed article here.
You will have to take out liability insurance as it’s legally required when you buy any vehicle, but that’s not the type of insurance that usually gets bundled into a car lease deal.
When does car leasing make sense?
It makes sense to lease a car when you can’t afford it or don’t want to buy it outright. In many cases, leasing can offer considerably lower monthly payments than other types of vehicle finance and it can be more tax-efficient than buying outright. If you do a lot more than average miles per year your monthly payment could be a lot higher than it would be for someone who does low annual mileage leasing the exact same vehicle over the same period with the same deposit.
Some people will tell you leasing is too expensive for anyone who puts a lot of miles on their car each year, but high mileage has exactly the same effect on your pocket no matter how you buy your car. Doing more miles increases depreciation or lowers the residual value, whichever way you want to look at it.
Even if you buy a car outright, it will be worth way less at the end of three years if you’ve done 75,000 miles than if you’d only done 15,000. Let’s say you bought a car for $40,000 and sell it three years later. If you only did average miles you might get $15,000 when you come to sell or trade it in, but with much higher mileage the car might only be worth $7,000.
If you divide that $8,000 difference by 36 months you’ll find you’ve effectively paid an additional $222 per month for your vehicle than you would have done if you’d only done average miles.
Leasing works in a similar way. The leasing company sets a residual value based on the number of miles you say you will do during the lease and how much the car is estimated to be worth based on that mileage. The lower the residual value the higher the monthly payment.
If you are someone who only does relatively low mileage, leasing a car can be a very cheap way to get a brand new car or get something better for your money than you would be able to by using other purchasing methods.
Can a car lease be extended?
You’ll find the majority of leasing companies will be only too willing to extend a lease that’s about to expire if that’s what you’d like to do. It could be useful to bridge the gap if your next car isn’t going to be with you on time and you can’t be without a car. Some companies will agree to a simple month-to-month extension, but some might ask you to sign up for a set extension period of three months or more.
Extending a lease is a good idea in the circumstances I’ve just mentioned, but there are drawbacks to consider. For a start, you’re going to be paying the same monthly payment for a car that’s worth much less than it was when you took out the lease, so you’re effectively paying new car money for a used car.
The other problem is maintenance. Extending the lease could mean you have to have the next scheduled service carried out at your expense, and your new vehicle warranty may have expired too. If anything major goes wrong you won’t be covered unless you take out a new warranty, which is more expense on top of those monthly payments.
How to pay less for your lease
As well as negotiating the price of the car you want to lease and the other factors mentioned above, you can reduce the cost of your lease further by making all the payments upfront. If you pay them all upfront you won’t be “borrowing” from the leasing company because they already have all the money required in the agreement and you won’t be charged interest on monthly payments because you’re not making any.
Let’s say you are going to be paying $30 per month in interest as part of the agreement you’re about to take out that can be saved by paying all the payments upfront. If it’s a 36-month term, that’s going to be a saving of $1,080.
If you can afford all the payments in one go, you might ask why take out a lease at all? Why not buy outright? The answer is that it’s still going to cost you less to lease a vehicle over a period like three years than the amount of money you would lose in depreciation if you bought it outright. For a real-life case study of this, check out this YouTube video where I give details of how much I saved on a car by leasing instead of buying.