If life is a highway and you're the type of driver who craves a new set of wheels every few years, leasing may be an attractive option. But there's more to a leased vehicle than that new car smell. Familiarize yourself with these essentials before you head to the dealership.
Leasing vs. buying: What's the difference?
Leasing a car is a bit like renting an apartment — you make monthly payments for an agreed-upon amount of time ( the industry standard for vehicle leasing is three years). When the contract's up, you return, purchase or exchange the vehicle.
Buying a car is like buying a house. When you purchase a car, it becomes your asset. Monthly payments go toward your eventual ownership of the vehicle, clear of any liens.
Read more: Accelerate your saving for your next vehicle with these visualization techniques.
How to lease a car
Follow these tips to navigate the lease process with ease.
Learn the lingo.
Lease contracts are full of jargon, which can make it tough to understand what you're agreeing to.
It's important to know these key terms:
Purchase option: The cost to purchase the car at the end of the lease instead of turning it in.
Capitalized cost (aka cap cost): The total amount of the lease. It includes the negotiated price of the car you're leasing, plus additional fees and taxes.
Lease rate (aka rent charge): A charge, similar to an interest rate, paid on a lease.
MSRP: The vehicle sticker price.
Residual value: The estimated value of the leased car after the contract ends.
Set a budget
Before you set your heart on a specific vehicle, determine a budget that includes short- and long-term costs. Include additional expenses your lessor may require, including:
Collision coverage: Covers the cost of damage from a collision with another car or object.
Comprehensive coverage: Helps cover repair costs from damage not caused by collision.
GAP coverage: Helps cover the gap between the depreciated value of your car and what you owe if it's stolen or totaled.
TT&L fees: Tax, title and license fees, which vary by state and locality.
Do your research
Break out the pros and cons list, it's time to dive into the details. The more you know about what's on the market (and how well a particular vechile model is or isn't selling), the greater negotiating power you'll have. Sites like Kelley Blue Book, Edmunds and Consumer Reports are good places to start.
Review lease terms
Expect your contract terms to include the vocab above, like cap cost and rent charge, plus the mileage cap (typically 10,000 to 15,000 per year), overage charges and the length of the lease. Lease contracts are typically hard to break (without hefty penalty fees), so be sure to fully understand your monthly payments and late fees, overuse charges and early termination fees.
Before you set your heart on a specific vehicle, determine a budget that includes short- and long-term costs.
Mistakes to avoid when leasing a car
Steer clear of these potential potholes when you're applying for a leased vehicle.
Not negotiating price
You can (and should) negotiate when leasing. But before you barter with the salesperson, know which parts of the agreement are up for debate.
Put your negotiation skills to the test for:
Cap cost: Work to reduce it below the MSRP. The lower you negotiate it, the lower your monthly payment will likely be.
Trade-ins: You can trade in your current vehicle to help lower monthly lease payments.
Purchase option: Typically set in the contract.
Total allowed mileage and overuse charges: Push for a higher mileage allowance or lower excess mileage charges.
Rent charge: A strong credit score may help you lower this.
Getting the wrong car insurance coverage
Car insuranceand liability insurance are mandatory — but minimum requirements vary by state. Most lease agreements also require full collision and comprehensive coverage, and GAP coverage.
Not maintaining the car
Keep the vehicle in (regular oil changes, tire rotations, etc.) or you may be subject to excess wear-and-tear charges when you return it.
Leasing a car for too long
If your lease extends beyond the vehicle's warranty period you'll be responsible for the cost of maintenance and repairs.
Underestimating how many miles you'll put on a car
If you exceed the total allowable mileage, you could pay overage fees at a set rate (for example, $.40 for every mile you drive over your limit).
Leased and ready to go
Leasing can be a smart option if you love having the latest and greatest. But whether you decide to lease or purchase a car, preparation is key to help you cruise down the financial road ahead.
