Vehicle Leasing Basics

The idea behind leasing is to pay the amount by which a vehicle depreciates throughout the length of your lease. Depreciation is the difference between a vehicle's original value and its value at the end of your lease. The value of the vehicle at the end of the lease is called "residual value." Depreciation is the primary factor that determines the cost of leasing, although other costs are added. The idea is for you to pay rent for the use of the leased vehicle.Here's an example:
$30,000 (original value) - $13,000 (depreciation over 3 years) = $17,000 (residual value)

It is important to realize that the low monthly price of a lease is only buying you the use of a vehicle. At the end of the lease you will have no trade-in, nothing to sell. If you do choose to lease, research different makes and models because vehicles do not all depreciate at the same rate over the same period of time.

Avoid leases that are more than three years long. If a lease is over 3 years, you may end up upside down (owing more for a thing than what it is worth) if the leased vehicle is declared a total loss in an accident. In such a case, there would be a "gap" between the amount the insurance company would pay and the amount due under the lease. You would be responsible for this extra amount, unless you have sufficient gap insurance.

1. Negotiate the lease price first, without discussing any trade-in. Negotiating the cost of your leased vehicle is the first and most important thing you should do. Offer a price that is less than the MSRP. Negotiating the lease price is critical because you are charged interest on the price, NOT the vehicle's residual value.

Your negotiation should not include any other factors, including the value of your trade-in. Your trade-in is an entirely separate issue that should not be discussed until after you have agreed on the price of your leased vehicle.

2. Don't let yourself be "sold." Vehicle salespeople can be pushy. Stand your ground and remember that it's your money. Always negotiate; the worst that can happen is that they say no. Because you have done your research, you will know when to use the power of walking away.

3. Look out for "hidden" charges! Capitalized costs are extra charges added into your lease. Be sure you find out about all capitalized costs, have them itemized for you and understand what these costs are for. Capitalized costs may include an "acquisition fee." Acquisition fees are similar to points paid on a mortgage loan and typically are not specified in lease contracts, so it's not readily apparent that you're paying them. Another possible capitalized cost is the balance owed on the vehicle that you're trading in, less any allowance for applied trade-in credit.

4. Don't lease longer than 3 years. Lease terms usually come in periods of 24, 36, or 48 months although unusual lease terms are sometimes promoted. Beware of any lease longer than 3 years (36 months). Your lease term should not be longer than the manufacturer's warranty on the vehicle. Short-term leases are the best choice because of the "gap" problem referenced above and because vehicles usually begin having functional problems after the fourth or fifth year.