Car Leasing Questions and Answers

Turn on the television, listen the radio or read the newspaper and you are bound to see an advertisement that makes leasing an automobile look like the deal of the century. The teaser ad or commercial is focused on a very low monthly lease payment for a vehicle that looks or sounds too good to be true. Your first thought is to run right down to your local dealership and lease that vehicle, but not too fast. I have put together some of the more popular car leasing questions that people ask me on a daily basis and the answers that you need to know before you take the plunge.

The most prominent type of auto leases are the ones offered by the finance divisions of the auto manufacturers, but there are also other institutions and companies that write leases for vehicles. No matter who holds your lease agreement you should know that all leases are not created equal and they can actually vary quite a bit from company to company. Before you decide to lease your next vehicle you be wise to know the facts and get the answers to the questions that many people ask about leasing a car.

1. What is car leasing?

The short answer to this question is that leasing a car is very similar to renting a vehicle. You might say that you are buying or leasing the amount of the car that you are using. So if you had a 3 year lease you are paying for the first 3 years of the car’s life. If you have surrendered to idea of always having a monthly car payment then leasing might be a great choice for you, but if you like to keep the same car forever or put lots of miles of your vehicles leasing is not for you.

2. Is it really cheaper to lease a car instead of buying one?

Leasing an automobile can be less expensive than buying, but there are also some conditions you must adhere to like annual mileage limitations. Going over your allowed mileage can be very costly. If you like to drive a nice new car every three years and you keep your mileage under 12,000 or 15,000 miles per year leasing could be a cheaper way to drive a current model car. For a comparison take a look at the post Leasing Versus Buying a Car.

Generally a monthly lease payment would be $100 to $150 lower than a comparable auto loan payment, but after 5 years the car will be paid off free and clear. On the other hand the lease payments will end after 2,3 or 4 years, but then you will have to lease or buy another car or go without wheels.

3. How much money do I need to put down to lease a car?

If you are going to take advantage of an advertised lease special that you need to look closely at the disclaimer in the ad. It will state the amount of money you need to put down plus tax, title and license. This can be several thousand dollars so make sure you understand all the details.

Depending on your credit score you could lease a vehicle with nothing down except the first monthly payment. However the fees, taxes, title and license charges will be added in which will raise your lease payment. Just like buying a car without a down payment you can do the same when you lease a car, but you payments will be higher.

4. What does Residual Value mean and where does it come from?

The term Residual Value means the amount that the automobile is worth at the end of the lease term. This amount is really no more than an educated guess because no one really knows what a car will be worth in 3 years. This is also the amount that you can buy your leased vehicle for after the lease is over. The residual value of the car is subtracted from the new price of the car and you will be financing the difference between the two.

For Example: The car you are going to lease sells for $20,000 and the residual value after 3 years is $11,000. You will be financing the difference of $9,000 for 3 years plus the tax, title, license and any applicable fees.

You should know that every car has a different residual value which usually determined by the auto maker of the lending institution that holds the lease. This value can vary greatly between manufacturer and even models by the same auto maker. The faster a certain car depreciates the lower the residual value and the higher the lease payment.

5. Are there different kinds of auto leases?

There are two different types of car leases, one is an open-end lease and the other is a closed-end lease. The name is a clue to the difference between these two leases. The closed-end lease means that the lease agreement will have a predetermined value for the vehicle at the end of the lease period. This will be the amount (residual value) that you can pay to purchase your leased vehicle regardless of the current market value or demand for that vehicle. This is the most common type of lease used today for the consumer.

The open-end lease uses the current market value of the vehicle at the end of the term to determine the selling price if should want to buy your leased vehicle at the end of the agreement. However this can be very costly if your leased car is valued less than the residual value. When this is the case you are responsible for paying the difference and could easily amount to several thousand dollars. That’s right you will be required to pay the dealer for the difference between the residual value and the current used car market value. You never want to enter into an open-ended lease because you have no control over the actual value of the vehicle, but you will be required to make up the difference.

6. What is a Money Factor for calculating a lease?

The money factor is used to calculate an auto lease and is similar to the interest rate that is used for computing an automobile installment loan. Although it is not presented in the same fashion as an interest rate, instead it is a decimal equivilent. For example a money factor of 0.265 would roughly equate to a 6.35% interest rate and a money factor of 0.0010 would be close to a 2.4% interest rate. So you can see that the lower the money factor the less the interest charge. Whether this is a way of decieving the customer or an easier to calculate the lease is not real clear, but it will have a direct effect on your monthly lease payment and something that you should be aware of before signing and lease agreements.

7. What if I drive more than the lease allows?

Every auto lease is structured for a set amount of miles for the term of the lease. The most common is 12 to 15,000 miles per year or 36 to 45,000 for a three year lease. You should be aware of how many mile you typically drive per year and use that figure to calculate the lease. I have seen leases that allow for anywhere from 10,000 miles per year to 18,000 miles per year. Obviously the higher the mileage allowance the lower the residual value and the higher the monthly payment. Most people drive an average of 12 to 15,000 miles per year, but you should estimate your needs based on your own driving requirements.

When you drive more miles than your lease allows you will be required to pay an overage charge per mile. I have seen leases charge anywhere fom $0.10 to $0.45 per mile. That means if you return your leased vehicle at the end of the term and you have driven 1500 miles more than you are allowed you will have to pay the per mile charge times 1500. For example: If you per mile charge was $ 0.25 and your excess miles are 1500 you will have to pay an additional $ 375.00. However if you under estimated you milage needs and you put an extra 6500 miles on the car you have to shell out an extra $ 1625.00.

Make sure you are aware of the extra miles charges that are part of your lease agreement and be sure to estimate accurately your needs. Otherwise you will be paying hundreds or even thousnads of dollars for a vehicle that you are returning to the dealer. It’s not uncommon for a dealer to sign you up for a lease with very low milage allownaces only to provide you with a low payment, but you will end up paying dearly in the end.

8. What does Wear and Tear mean on the lease agreement?

You will find that all lease contracts allow for normal wear and tear of the leased vehicle. The problem is what exactly is considered normal wear and tear. After three years of driving a car and putting 30,000 miles or more there is bound to some scratches, door dings and dirty uplholstery, but what you consider normal and what the car dealer considers normal can be two different things. If you return a car at the end of the elase period with excessive wear and tear you will be required to pay for the repair, cleaning or paint touch up. Typically the higher price of the car the more picky the end of lease inspection will be. For the most part the manufacturer lease agreements are pretty fair about what is normal, but there are dealers that push the envelope. Get a clear understanding on exactly what is consider normal before you sign a lease.

9.  Can I end the lease early?

You can get out of you auto lease early, but it will cost you. It’s very much the same as paying off an auto loan early where you will be responsible for the remaining principle balance. Also depending on the lessor you may be responsible for paying a penalty and lease end fee that could be several hundred dollars. Typically the auto maker leases do not have lease end fee or penalty, but you are still required to pay off the balance. You should remember that the vehicle will depreciate rather quickly in the first year or two and very little principal will be paid down so be prepared to pay the difference. You can trade in your open lease to buy another car, but you will probably be several thousands of dollars upside down and this will more than likely need to be paid out of pocket. If you are going to lease a vehicle you should be prepared to fulfill your commitment or count on spending many thousands of dollars to get out of your car lease early. This is one of the car leasing questions that you need to know the answer to before you find yourself putting out 5 to 15,000 thousand dollars for nothing.

10.  How long can you lease a car?

You can lease a car for a variety of different terms which is dictated by the financial institution that provides and services the lease. Typically auto leases are anywhere from 24 to 60 months. However some auto makers have lease specials that are structured at 39 months, namely Ford Motor Credit. The term of the lease is usually the choice of the lessee (person leasing) as long it is one of the terms offered by the lessor (financial institution). The most common lease term is 36 months or 3 years and this usually because the vehicle is covered under the manufacturer’s warranty for 36 months. (See #12 Warranty Coverage)

11. Do I need to pay for the maintenance of the leased car?

The short answer to this car leasing question is yes, you are required to pay for all regular scheduled maintenance and repairs for the term of the lease period the same as if you owned the vehicle. Unless however the auto maker includes some type maintenance plan that covers those expenses, however most do not. This means that you will have to pay for oil changes and recommended servicing in addition to any wear items that are not covered by warranty. This is one reason why most leases are written for a 3 year period because that way any repairs will be covered by the warranty. So if you lease a vehicle longer than the warranty period of years, months or miles you are also responsible for repairs in addition to the maintenance.

12. Does the car warranty cover leased cars?

Most auto manufacturer’s comprehensive warranties are for 3 years or 36,000 miles and they will cover all repairs for that period the same way they would if whether you bought or leased the automobile. So a good rule of thumb when leasing a vehicle is to select a lease period that does not exceed the warranty period to avoid having to pay for any costly repairs.

13. Do I have to pay any money at the end of the lease?

The answer to this car leasing question depends on who leased the car to you. If your lease is held by one the auto makers finance divisions then typically the only items you have to pay for is excess miles, damage or excessive wear. However if your lease is held by a bank or lending institution that is not a part of the manufacturers lending arm there could be charges for inspection or a lease end fee. I have lease end and inspections fees total anywhere from $400 up to $800 so it is very important to make sure you know about these before you sign your lease.

14. Can I buy my leased car at the end of the lease?

When you do your paperwork at the beginning of the lease it will show the residual value of the vehicle and in most cases that is the price you will pay if you want to purchase your leased car as long as it is a closed end lease. If you have an open end lease the financial institution that held the lease will determine the purchase price and may include a purchase fee of several hundred dollars, which is another reason to stay away from the open end lease.

The auto maker’s closed end lease is the best way to lease a car because everything is spelled out clearly and if you want to buy your leased vehicle you will know exactly what the price will be from looking at your contract.  That way when you lease is over you have several options which include: returning the leased vehicle, buying the leased vehicle for the residual value or selling your car outright as long as you pay off the residual value when you sell it.

15. Do I insure a leased car the same way I do when I buy a car?

Usually you would call your insurance agent and add the leased car to your policy just as you would if you bought and financed the car, but with one exception. Make sure your agent knows that the car is leased and then add Gap Insurance unless the manufacturer includes it in the lease.

Because you typically down have a sizable down payment when you lease a car Gap insurance is a very good idea. That way if something happens to the automobile and the insurance only pays the current value the Gap insurance will make up the difference between the market value and the amount owed on the lease. New vehicles depreciate quickly and the market value could easily be less than what insurance pays, but with Gap Insurance you won’t run a chance have having to make up that difference yourself which could add up to several thousand dollars.

Many of the auto manufacturer’s leases include gap which is another plus for leasing through the car maker, but make sure you are covered one way or the other.

16. Can I negotiate the price of the car when I lease?

One of the most common tricks that car dealers use when they lease a car is to use the M.S.R.P. or list price to work up the lease. Most people don’t realize that you can negotiate an auto lease just like you can when you buy a car. The car dealership can write up a lease using any price that you agree on whether it is list price or the dealer invoice price.

Before you decide to lease a car you should do some research and know the numbers. You can go the Steps to Buying a Car and do some research before you sign a lease that nets the dealership thousands in profits. To the car dealer there is very little difference if they lease or sell you a car. When they sell you a car you are the buyer, but when they lease a car the financing institution is buying the car and the customer in leasing from the lease holder. For specific leasing information and specials from the individual auto makers take a look at the Automobile List of Manufacturers.

This section should answer most of your car leasing questions, but if there is a question about leasing vehicles that wasn’t covered please drop an email and I will answer your questions and then post them it in this section.

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