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A lease is a contract by which the owner of a
property (the lessor) allows another individual
(the lessee) to use the property for a specific
period of time. Unlike buying, you do not own the
vehicle and you must return the vehicle when the
lease term ends.
Most dealerships offer balloon notes as well as
leases. Balloon notes are similar to a lease but
the vehicle is in the customer’s name. Balloon
notes offer low monthly payments with a large final
payment due at the end of the loan term. If you decide
to buy at the end of the term, you do not have to
pay sales tax again.
Use the Leasing And Buying Comparison Chart
to see how leasing differs from buying.
Leasing can be a cost-effective way to drive the vehicle
that you have always wanted. However, you must take
the time to understand and negotiate the best lease
for you. Then do your best to meet the terms of your lease.
Lease Offers And Terms
You can lease from a new-vehicle dealership
or from an independent leasing company. Compare
lease terms and costs because they vary
significantly from lessor to lessor. Avoid
focusing exclusively on monthly payments.
Closed-End Lease
There are differences between closed-end leases
and open-end leases. A closed-end lease gives you
the option to buy the vehicle at the end of the
leasing period or return it and walk away. If you
want the most flexibility and are not sure whether
you will eventually buy the vehicle, choose a closed-end lease.
Open-End Lease
Open-end leases require you to buy the vehicle at the end of
the lease period. These contracts generally have lower
monthly payments but obligate you to buy the vehicle
at a predetermined, fixed residual value when the lease
ends. You may get a bargain if the fair market value at
the end of the lease is higher than the fixed residual
value. But if the fair market value of your vehicle is
lower than the fixed residual value when the lease ends, you
incur a loss. Either way, you buy the vehicle.
Calculating Residual Value
Generally, residual value is determined by the vehicle‘s
estimated rate of depreciation. In most cases, the higher
the vehicle‘s residual value or down payment,
the lower your monthly payment.
If you expect to buy the vehicle at the end of the
lease, negotiate the lowest residual value possible.
If you do not buy the vehicle at the end of the lease,
negotiate the highest possible residual value because
it will lower your monthly payments. Understand all lease
terms and costs.
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How is normal wear and tear defined in the contract?
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Are there restrictions on who does maintenance and repair?
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How is the buyout price— what you must pay at the end of
the lease to buy the vehicle — determined?
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How is the total cost of the vehicle lease computed?
Mileage Limits
Most lease contracts specify a mileage allowance — the
maximum number of miles that you can drive during the term
of the lease without incurring a penalty or excess
mileage charge. Generally, annual allowances range
from 10,000 miles to 15,000 miles. If you exceed this
allowance, expect to pay 15 cents to 30 cents for
each mile over the allowed mileage. Consider negotiating
a higher mileage allowance before you sign the lease
agreement if you know that you will drive more than
the maximum allowed.
Lease Terms
Most lease terms run from 24 months to 60 months. If
the term offered does not meet your needs, you might
be able to negotiate a different term.
Remember that the shorter the lease term, the higher
your monthly payment. If your lease is for 3 years or
less, your vehicle will always be under warranty without
purchasing additional protection.
GAP Insurance
GAP insurance pays the difference between the insured
value of the vehicle and the costs for early termination
of the lease if the vehicle is stolen or damaged beyond
repair in an accident. Make sure the coverage is
sufficient to protect you in case of a total loss.
Acquisition Fee
An acquisition fee, assignment fee or bank fee is
an administration fee charged by the leasing company,
much like points on a mortgage. This fee may not be
explicitly specified in your contract but is included
in your Cap Cost when calculating monthly payments. Ask
about it if you do not see it noted. This fee typically
ranges from $250 to $900, depending on the value of
the vehicle. High-end vehicles have higher acquisition
fees. You may be able to negotiate the fee.
Disposition Fees
Look for a disposition fee — what you may be
charged when you return the vehicle to get the
vehicle ready for resale. Like most lease fees, this
one is negotiable and can even be waived completely.
Early Termination Fees
If you need to end your lease early, you may be
required to pay an early termination charge to
satisfy your lease obligations. This payment
may be substantial. The earlier you end your lease,
the greater the early termination charge is likely
to be. The early termination charge is typically
the difference between the balance remaining
on the lease (lease payoff amount) and the amount
credited for the vehicle (realized value of the
vehicle). If you suspect that you might need to
end your lease early, either negotiate more
favorable early termination charges before you
sign a lease contract or rethink your decision to lease.
Negotiate Terms
Negotiate every term possible. You can save
considerably by carefully negotiating the provisions
of your lease. Understand everything before you
sign anything. Read the contract slowly and
carefully. Ask questions and clarify terms that
are unclear. Question any fee or any provision
that seems unreasonable. Remember that you can
walk away from negotiations at any time before
you sign the lease contract.
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