Intro:
Before You Begin
Step 1:
Know the language
Step 2:
Assess the costs
Step 3:
Contract according to your needs
Step 4:
Understand end-of-lease charges

2torial #0618: Learn2 Lease a Car Drive a hard bargain! With the average cost of a new car hovering around $20,000, many people are searching for purchase alternatives--but lease contracts are both misleading and mind-boggling. If you always like to drive a new car, or if you don't want to pay for the depreciation of a new car, a lease may be a good idea. But if you drive your cars hard or keep them until they fall apart, think again: leasing is not so simple as a making some payments and giving the car back. Still, there are some good reasons to pursue this path. After all, one out of four cars today are leased, about three out of four in the luxury car range. The make-up of the contracts can vary greatly from company to company. For this reason, it's especially important to both understand the agreements and--of course--shop around for what you need. Let's be clear about what a lease is. If you lease, you have no obligation to keep the car after the end of the lease term (on a closed lease), as long as you have observed the mileage and wear-and-tear stipulations. But you'll also have to find another car. Basically, a lease is a long-term rental agreement. Make sure you look for the car that is right for you. Don't settle for a good deal on something you don't want. As with any contract, read the small print. An incredibly low monthly payment should send up warning signs: there may be hidden charges. Know the language Like any new territory, the land of the lease has a distinctive lingo. Understand buzz phrases such as the following: MSRP: The Manufacturer's Suggested Retail Price, set by the car company. This price must be posted in a new car's window, but there can be additional charges that vary from dealer to dealer. Total capitalized cost: the base price of the car, sometimes called "Invoice Price." You'll want to negotiate from this buying price. Capitalized cost reduction: the deposit on the lease which reduces the monthly lease payment. No money down: usually this term is a red flag, one of those vague (possibly sneaky) descriptions. Often, they'll say there is no "money down." In reality, you must come up with a few payments to qualify for the lease. Depreciation: the decrease in value of the car during the lease term. This is usually assessed on a monthly basis. Residual value: this is very important to be clear on. It's the car's predicted value at the end of the lease term. It's about .65 for two years, .57 for three years and .41 for five years. Early termination charge: the fee for ending the lease earlier the date specified on the lease. Note: if the lease ends because you wreck the car in an accident, you may be charged with this fee. Liability after casualty loss coverage: an agreement with the leasing company, also known as gap coverage. In case of fire or theft, this covers any remaining costs between the value of the car and what the insurance company actually pays. Money factor: the leasing company's interest rate to calculate finance costs. Multiply by 2400 (that figure is common to all leasing companies) to get the annual percentage rate. For instance, the interest rate on a .0035 money factor (x2400) will be 8.4%. Deposits: this is money you pay to offset possible return fees. Unlike the capitalized cost reduction payment, the deposit does not bring down any of your capitalized costs. Assess the costs   Go into the showroom pretending to buy, and (important!) negotiate the purchase price first. This way you'll have a firm assessment of the car's value from the start; only then should you ask about leasing. Once you've got the car's selling price, get the residual value of the car after the lease expires. Ask for a residual value estimate in dollars, not at "market price." That will protect you if the car's value is lower than expected at the end of the lease. Here are some sample prices: let's say the selling price is $17,300, but you negotiate it down to $16,000. Then you make a $1000 down payment to keep your monthly payments down and thus arrive at $15,000, which is your net lease price.   For a three year lease: The residual value is set at 57%, or $8,550. The car's total depreciation is $6,450, which is divided by 36 months: this sets the monthly depreciation fee at $179. The monthly payment combines the depreciation fee with the lease fee. This is calculated as: (net lease price ($15,000) + residual price ($8,550)) x money factor (.0035) = monthly payment ($82.43). Thus, the monthly payment in this situation would be $261.43.

Contract according to your needs

The advantages of leasing soon fade if you have to pay an early termination fee if your car is stolen, or if you just change your mind about the car. Sometimes these fees can be equal to the total of your remaining monthly payments. To avoid this situation:

• Get a lease that allows early termination. Ask the salesperson to calculate how much you would have to pay if you terminated after half of the term. Get this in writing.
• Don't get a lease for longer than you expect to drive the car.
• Set a reasonable mileage projection.
• If the lease terms claim early termination is cause for default, watch out. This means you would be responsible for the cost of the car if, for example, it was stolen or destroyed. Again, get this information in writing.

Get a closed-end lease. That means your residual value is set, and not dependent on the market when you return the car.

Understand end-of-lease charges

Basically, anything your lease agent agrees to, GET IN WRITING. Be sure to note the following items:

• Any excess mileage charges (above about 12-15,000 miles/year) upon returning the vehicle. Ten cents a mile for a middle-priced car and fifteen cents a mile for a more expensive car ($15,000-$30, 000) is reasonable. That means for 1,000 miles above normal per year, you'll pay 100 or 150 dollars extra each year.
• Wear and tear charges: Leases often charge for mechanical damage, but make sure these are reasonable. Try to include a clause in the contract that will allow a third-party appraisal of any damages.
• Ask if you would be charged if you decide to return the car instead of buying it at the lease's end.

Liability after casualty loss coverage: Also called gap coverage, this covers the amount your insurance company would not cover in case of damage or theft of the car. If this isn't included in your current policy, it should cost at the most an additional two hundred dollars.

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