How to Lease a Car

September 14, 2012
If you're in the market for a car, you have two main options: buying or leasing. As with buying a home vs. renting, each approach has its advantages and disadvantages. If you don't know how to lease a car, you may think that buying is your only option, but if you can't buy right now, you don't have to go without a car. In fact, there are a number of reasons why leasing might even be a better option for you.

What Is Leasing?

Leasing a car means that you take possession of that car and it is yours to use, but the dealer still owns the car. It is just like renting an apartment, in that you are paying for the right to use the product for a specific term, but at the end of that term, possession reverts to the original owner. However, unlike an apartment renting situation, you will often actually have the option to buy once the terms of the lease are complete. You don't have to decide this until the end of the term, so you are not signing on for any commitment beyond the terms of the original lease when you lease a car.

How to Lease a Car

You can arrange leasing terms with your dealer just the way you would if you were going to buy a car. Keep in mind of course, that unlike securing a car loan to buy a car, you do not own your leased car unless you buy it at the end of the lease term. Your dealer will establish a residual value for the car. This is the estimated value of the car once the term is over. It is how much you will be able to buy the car for at the completion of the lease term, and it is also used to determine your monthly lease payment. Your car will generally be estimated to lose 35 to 65 percent of its value over the course of the term. The more your car is estimated to depreciate, the higher your monthly payments will be, since you are, in a way, using up the "good" time for the car, the time when the car is worth the most. Your lease agent may also offer you some kind of termination insurance. This protects you if the car is stolen or destroyed before the term of the lease is complete, so that you are not stuck for the full term of lease payments without having a car to show for it. You may still be required to pay an early termination fee, and you will almost certainly have to pay an early termination fee if you break the lease without the car being destroyed or stolen. Therefore, you should find out in advance the consequences of early termination.

Fees and Reductions

There are a number of factors that may affect the cost of your lease. One factor that can lower your monthly payment is a cap reduction. A cap reduction, or capital reduction, is a payment you make up front to the leasing company. This allows them to defray the cost of the car, which in turn results in lower monthly payments for you. You can often trade in your existing vehicle and use that as a cap reduction on a new lease. There are also a number of fees that you may have to watch out for when leasing. In addition to the termination fee already mentioned, you may be required to pay an excess mileage fee if you exceed the number of miles that you are allowed to accrue for the term of the lease. You may also be charged an origination fee, which is simply a fee that the leasing company adds for the service of providing you with the lease contract. In addition, check to see if there is a disposition fee. This is a fee that is paid at the end of the term if you choose not to buy the car. So if you have no intention of leasing to own, it's important to find out if such a fee will be charged, how much it is, and if it is negotiable.

Leasing to Own

You will often find that you have the option to buy your leased car at the end of the lease term, and, as mentioned, you will even know in advance how much that will cost you. If you become comfortable with your car over the course of the term and aren't interested in looking for a new one, this is a nice option, but if you know in advance you will want to own your car, bank financing to purchase the car outright from the beginning is almost always a wiser and more economical option.

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