How to Understand a Car Lease

When you lease a car, you put little or no money down and can drop off the car after a few years without the hassle of selling it. Convenient, yes'but potentially complicated.

Instructions

Difficulty: Moderate

Things You’ll Need:

• Car Insurance

1. Think of holding a lease as making payments on the amount that the car depreciates while you have it. That depreciation is figured by subtracting the car's projected value at the end of the lease (residual value) from the sticker price (Manufacturer's Suggested Retail Price, or MSRP). For example, if a vehicle with a sticker price of $20,000 has a projected value of $12,000 in four years, the depreciation is the difference, or $8,000. You'll be making payments on this $8,000.
2. Know the parameters of a closed-ended lease. These leases give you the option of purchasing the car at the end of the lease term, but also allow you to walk away without buying. Generally, the purchase price is determined before the lease is signed. Closed-ended leases offer the benefit of choice.
3. Understand that open-ended leases require you to buy the car at the end of the lease. The price is the projected value. These can get expensive if at the end of the lease the projected value of the vehicle is larger than the fair market value. Open-ended leases generally offer the advantage of lower monthly payments.
4. Read the lease agreement carefully and understand any restrictions. For example, some leases won't allow you to take the car out of the country.
5. Look under the section called Early Termination. This section explains what will happen if you decide you don't want the car anymore or if it's totaled in a wreck. You will be required to pay at least the remaining lease payments, a disposition fee and possibly other fees, depending on your lease. Be sure you understand these charges before you sign any papers.
6. Remember that your insurance company might not pay what is still owed on the car after an accident. That's because your car may have depreciated by an amount more than you've paid on the lease. Some leases offer gap insurance to cover the difference.
7. Read the section on wear and tear. It should describe in detail what the leasing company will accept as regular wear and tear and what is considered excessive wear, which will add more to your final payment.
8. Know your mileage limit (usually 12,000 to 15,000 miles a year). Keep your car under that limit or you'll pay up to 25 cents for every mile over it. This fee adds up quickly.
9. Find out if your monthly payments include the final disposition charge or if you'll have to pay that at the end. This charge covers transferring the car to the dealer and getting it ready to sell.

Tips & Warnings

• Keep up on the scheduled maintenance and save the records. You don't want to invalidate the warranty or give the leasing company any reason to charge you extra when you return your car.