Step 1 of 2:
Tell us what you're looking for and here you live so that we can find a trusted dealer near you who offers competitive Internet prices
- Who leases?
- What is leasing?
- Can you negotiate the price of a lease?
- When is leasing right for you?
- When is buying right for you?
- What are your responsibilities in leasing agreements?
- Glossary of leasing terms
- Sample lease calculation and negotiating advice
Who leases?
What is leasing?
For example, if you lease a car that has a residual value of 40%, your payments are calculated based on 60% of
the value of the car. You also pay interest on the entire amount for the term of the lease. The interest rate
is called the 'money factor' or 'lease factor.' If you wish to buy the car at lease-end, it will cost
you the remaining 40%.
With leasing, payments will be lower than purchasing that same car since you are not paying the full cost
of the vehicle. This can either allow you to get a more expensive car for the same payment, or get a lower
payment and use the extra money for something else.
The length of your lease agreement, the monthly payments and the yearly mileage allowance can be tailored
to your needs. You'll want to adjust the components that are important to you. For example, you may not want
to make a down payment if you don't mind somewhat higher monthly payments. You also should be sure the yearly
mileage limits fit your requirements if you think you will be turning the car in. With some leases, you
can negotiate for additional miles up front if you know you'll be driving more than average. Average is about
15,000 miles per year.
A lot of people have discovered the advantages of leasing. In fact, industry experts predict that within 10
years, 50% of consumers will lease a vehicle. Today, one in three new vehicles is leased. When it comes to
luxury cars, nearly 60% are leased, according to research done by J.D. Power and Associates.
When you lease a car, you are actually borrowing it from the leasing company and paying for the depreciation
that occurs during the term of the lease. Your payments are based on the difference between the price of the
car (its 'capitalized cost') and what it is worth at the end of the lease (its 'residual value'). If at the
end of the lease you wish to buy the 'rest' of the car, you may exercise the purchase option as defined in your
lease agreement. If not, you're done and you return the car to your dealer at lease-end.
Can I negotiate the price of a lease?
Your best bet when leasing is to choose a model with a subvented (manufacturer subsidized) lease. Subsidized
leases allow dealers to lower payments by artificially raising residual values or lowering the capitalized cost
through dealer incentives. You can easily recognize a subsidized lease. Any nationally or regionally
advertised lease is generally subsidized by the manufacturer to keep lease payments low.
Different dealers and manufacturers will offer different lease rates and are willing to negotiate for your
business. While the residual value and money factor are set by the leasing company, the capitalized cost is
essentially how much the car costs. You'll want to negotiate this figure just as if you were buying the car.
Shopping for a lease from several different sources can help you get exactly what you want.
When is leasing right for you?
Generally, you should lease when you want the following things:
When is buying right for you?
Generally, if you plan to drive your vehicle for more than just a few years, you consistently drive well over
15,000 miles a year, you subject your vehicles to rough treatment, you plan to modify your car in any way or you
feel more comfortable with the idea of "owning" a vehicle, traditional financing is probably right for you.
What are your responsibilities in leasing agreements?
You are also responsible for "excess" wear and tear as defined in the lease agreement. Examples of excess
wear and tear vary by lessor but may include broken glass; damage to body and trim (minor paint chips or scratches
are generally not considered excessive); torn, damaged or stained interior; missing parts or equipment;
and mechanical conditions that cause noisy, rough or improper operation. Minor excess wear and tear can
usually be prevented by following the maintenance schedule recommended in the owner's manual.
Finally, you are responsible for any miles driven over the total mileage limit determined in your lease agreement.
NOTE: With some leases, you can negotiate for additional miles up front if you know you'll be driving more than average.
You are typically responsible for providing valid public liability and physical damage insurance policies for
your leased vehicle as well as regular maintenance on the vehicle. In most cases, your new leased vehicle is
covered under a manufacturer's warranty. Ask your dealer to explain the terms of the warranty.
Glossary Of Leasing Terms
Acquisition fee Capitalized cost Cap cost reduction Closed-end lease Depreciation Disposition fee Document fee Down payment Early termination penalty Excess mileage charge Gap protection Independent leasing company Initiation fee Lessee Lessor Money factor MSRP Open-end lease Preparation fee Purchase option price Rent charge Residual value Subvented lease Term Termination fee Trade-in allowance Wear and tear
The fee a lessor charges for the preparation of a vehicle and paperwork for lease. Similar to a
dealer-preparation charge.
The negotiated selling price of the vehicle.
More commonly known as a down payment, this can be either cash or a trade-in. This amount is app
lied to the capitalized cost to reduce monthly payments.
A lease which allows the lessee to return the vehicle at the end of the lease term with no additional
liability for the shortfall between the actual value of the vehicle at lease end and the projected residual
value stated in the lease. In a closed-end lease, the lessor essentially guarantees the future value of the vehicle.
The lessee under a closed-end lease is still responsible for the cost of excessive wear and mileage.
A vehicle's decline in value over the term of the lease.
A fee charged by most lessors to cover the expense of preparing and reselling (usually auctioning) a leased
vehicle at the end of the lease.
A fee charged by some dealers to cover the cost of preparing lease documents.
Any cash you give the dealer or lessor to reduce the capitalized cost of the vehicle. See cap cost reduction.
The fee charge to a lessee in the event of an early termination of a lease. Penalties vary from lease to lease and are
determined at lease inception.
The fee charged for exceeding the predetermined mileage cap, usually set at 15,000 miles per year.
Gap protection (or gap insurance/gap coverage) covers your termination liability under the lease (future payments, fees)
if the vehicle is totaled or stolen before the end of the lease. Most gap coverage requires that you not be in
default under your lease. Many contracts have built-in gap protection (essentially a "gap waiver") which requires
you meet a number of criteria before the coverage becomes effective. For example, virtually all gap waivers and
policies require you to pay the deductible on your ordinary insurance before the gap coverage becomes effective.
Read your contract carefully to make sure you have gap protection.
A company not affiliated with any particular vehicle manufacturer that leases directly to consumers or businesses.
Same as an acquisition fee.
The individual or company that uses the vehicle.
The individual or company that purchases the vehicle and leases it to the lessee.
A small fraction which is used by some lessors to calculate the average monthly rent charges.
Manufacturer's Suggested Retail Price. Also known as the "sticker price". By law, this price is required to
be displayed on the new vehicle's window sticker.
A lease which requires the lessee to make up any shortfall between the actual value of the vehicle at lease
end and the projected residual value stated in the lease. If the vehicle is worth less than the lease's residual
value, the lessee must pay the difference. An open-end lease also gives a lessee the option of purchasing the vehicle at lease-end.
Also known as the "prep fee". This is a fee charged by many dealers to cover the cost of preparing a vehicle
for delivery to you.
A predetermined purchase price for a vehicle at the end of a lease.
This is leasing's equivalent to interest on a conventional loan.
The projected market value of a vehicle at the end of a lease. Also known as the lease-end value, it is established
at the time of lease inception and is used to calculate your monthly payment. Residual values will vary depending
upon the model you choose, the lessor, the amount of miles you anticipate driving, and particular promotions being
offered on that model. In virtually all cases, the lessor - not the dealer - sets the residual value.
A lease subsidized by a manufacturer, which may offer a better interest rate, residual value and a lower
capitalized cost than independent leasing institutions.
The length of time a lease lasts. Most terms are 24 to 48 months long.
See "disposition fee" above.
The net credit given to a buyer or lessee for a vehicle traded in (whether or not the traded vehicle is owned or being leased).
Damage or depreciation due to normal use of a vehicle. A lease will specify that a lessee is not responsible
for normal wear and tear, and will usually define what "normal" means.
Sample lease calculation and negotiating advice
Example of a 3-year lease:
It is not easy to calculate a lease payment, particularly when the
lease is subvented (subsidized) by the auto maker. However, you may
estimate lease payments by using the following formula, which is
illustrated using a sample vehicle along with some advice to help your
negotiating process.
| MSRP | $26,000 | Once you find a car you can afford, negotiate from MSRP and then explore leasing based on the negotiated price (capitalized cost). |
| Capitalized cost | $23,000 | This value is the negotiated fair price. |
| Destination charge | $450 | |
| Acquisition fee | $450 | |
| Security deposit | $300 | |
| Capitalized cost reduction (destination charge + acquisition fee) | $450 + $450 = $900 | A down payment or value from a trade-in is a lso considered a capitalized cost reduction. In this example, there is no down payment. |
| Total payment due at lease inception
(security deposit + cap cost reduction) |
$300 + $900 = $1,200 | We recommend paying the destination charge, the acquisition fee and the security deposit up front rather than rolling them into the lease. |
| Residual value after 3 years (60% of MSRP in this example) | $26,000 x .60 = $15,600 | Every vehicle will have a unique residual value, based on its popularity, its resale value and its reputation for reliability. Your best bet when leasing is to choose a model with a subvented (manufacturer subsidized) lease. Subsidized leases allow dealers to lower payments by artificially raising residual values or lowering the capitalized cost through dealer incentives. You can easily recognize a subsidized lease. Any nationally or regionally advertised lease is generally subsidized by the manufacturer to keep lease payments low. |
| Term depreciation (capitalized cost - residual value) | $23,000 - $15,600 = $7,400 | The trade-in value and any cash down payment should be deducted from the capitalized cost before calculating the lease. If you're upside down on your trade, which means the car is worth less than you owe on the loan, you'll need to add the difference between the balance due on the loan and the trade-in value to the capitalized cost. |
| Money factor (interest rate divided by 24) |
.08 / 24 = .0033 | If the money factor is expressed as a percentage, convert the percentage to the money factor by dividing the number by 24 (regardless of the term of the lease). |
| Monthly lease rate or rent charge
(capitalized cost + residual value x money factor) |
($23,000 + $15,600) x .0033 = $127.38 | This is equivalent to interest in conventional financing. |
| Monthly depreciation (term depreciation divided by lease term) | $7,400 / 36 = $205.56 | |
| State sales tax ([monthly depreciation + monthly lease rate] x sales tax rate [6% in this ex.]) |
$205.56 + $127.38 x .06 = $19.98 | |
| Monthly payment (monthly depreciation + monthly lease rate + state sales tax) |
$205.56 + $127.38 + $19.98 = $352.92 | Note that this formula does not take the following into account: delivery and handling (D&H fees), documentation fees, the cost of license plates, city or county sales tax (if applicable in your part of the country) and trade-in values. |