Car Leasing Facts

The popularity of leasing cars is increasing as more people understand the benefits of leasing a vehicle over buying one. When you buy a car, you must finance the entire cost of the car. When you lease a car, you pay only for the time that you use it. The terms of the lease will determine how much you'll pay for the car.

Features

Leasing a car requires a deposit along with monthly payments. Once the contract is up, you can lease the car again or lease a newer car. This is another benefit of leasing: the chance to drive a new, different car every few years, which beats having to buy a new car or worry about your car breaking down. If anything goes wrong with the car due to manufacturing issues, the dealer will fix the car at no cost to you. If you don't like the idea of giving back the car at the end of the lease, some contracts offer the option to buy the vehicle.

Maximum Mileage

Most dealers set a maximum annual mileage during the leasing term, because they want to ensure that people will lease the car after you've completed your contract's term. There's typically a fee for each extra mile that you use. Most maximums are set at 5,000 to 10,000 miles annually. If you have a flexible contract, you can have the mileage adjusted according to how you'll be using the vehicle.

Understanding Contracts

When you enter into a contract, it is important to understand the terms and conditions. Make sure to read the entire contract before signing and ask lots of questions if you don't understand certain terms.

Calculating Costs

To determine your monthly payment, the dealer will subtract the residual value--the market value of the vehicle after your lease term--from the sales price. This determines the depreciation of the vehicle, which is then divided by the number of months in your term.
To find the interest on the lease that will be added each month, add the sales price to the residual value and multiply the result by the money factor (which is similar to an interest rate). Add the result to the amount derived from the calculation above to get your total monthly payment.
You'll also need to account for taxes and dealer fees, which will be specific to your situation.

Features

Here are some features to look for in a car lease:
Flexible terms: Terms between 24 and 60 months.
Diverse payment options: Allow you to pay all the money up front or put more money down to reduce the monthly bill you'll receive.
Mileage flexibility: Adjusts the maximum mileage. You can also get a refund on the miles that aren't used.
Gap waiver: Offers coverage for the difference in the proceeds from insurance and the amount owed on the vehicle if the car is stolen. The deductible is subtracted from this as well.
End leasing options: How you end your leasing deal can be through releasing, returning the car or buying it.
Variable deductibles: Allow you to pay a lower premium.