Before You Lease a Car
By Kristi Vaughan
Before you put pen to paper and sign a lease with an automobile dealer it is a good idea to understand the key components of that lease.
What is a lease?
A lease is a commitment made between you and a car dealer, or leasing company. In return for the monthly payments you make, the dealer lets you use a specific car for a specific amount of time. Additionally, you make certain promises, including, but not limited to, an agreement to drive no more than a preset number of miles, to maintain the vehicle and to insure the vehicle. If you don't fulfill those promises, you've agreed to be financially liable.
What goes into a lease?
As with buying a car, leasing a car starts with price. MSRP is the manufacturers suggested retail price, or sticker price, and a point from which you can start negotiating. Again, as with buying, there are many factors, including supply and demand, that affect whether the dealer will lower the price.
In leasing terms, your agreed-upon price is the capitalized cost. The capitalized cost is the basis for determining monthly lease payments. It can be reduced by a down payment, by the value of a trade-in or by rebates and factory-to-dealer incentives. Such reductions are called capital cost reduction.
One of the next important numbers to consider is residual value. Residual value is the expected value of the car at the end of the lease term. Residual value is affected by the amount of miles that are included in the lease and the depreciation rate of the vehicle. Higher mileage and a more rapid depreciation rate will result in a lower residual value. Because in a lease you are paying for the depreciation, you will have lower payments if there is a higher residual value.
One number that you have no control over is the money factor. This is the interest the leasing company is charging you for the privilege of using one of their cars. Dealers and leasing companies use different money factors so it can pay to shop around. The lease term plays a large role in the monthly cost of the lease. Cars depreciate at a higher rate when they are newer so a longer lease usually results in a lower monthly cost.
