Leasing a Car
Get key information about a car lease before you sign on the dottedline.
Many new car drivers lease, rather than purchase, their vehicles. Although leasing can be a good deal for some people, for many it's not. Before the dealership persuades you that leasing is the answer to your prayers, you should have a good understanding of the advantages and disadvantages of a lease, where to get a good lease deal, how to get all the facts about cost, and what happens if you have to cancel the lease early.
What Is a Car Lease?
When you lease a vehicle, you don't own it. You get to use it during the lease term, for a monthly fee, but must return it at the end of the lease. In many leases, you have the option to buy the vehicle at the end of the lease. (For more information on short-term car rentals, see Nolo's article Renting a Car.)
The Advantages of Leasing
There are two main reasons people lease, rather than buy, a vehicle:
- People who like to drive a new car every few years will usually pay less by leasing rather than buying. And they also don't have to deal with getting rid of their old car they just turn it in at the end of the lease period.
- Lease payments are usually lower each month than loan payments for any given car. As a result, many people lease in order to drive a more expensive car than they could afford to buy.
The Disadvantages of Leasing
Although you may be eager to drive an expensive new set of wheels, consider the following disadvantages to leasing a car before you make your final decision:
- If you continually lease your cars, you will have never-ending car payments. If you look forward to paying off your car and owning it free and clear, don't lease.
- If you decide to buy the car at the lease-end, you'll pay several thousands of dollars more than if you had bought it initially. For example, if you buy a car, paying $500 a month for four years, you'll pay a total of $24,000. You might be able to lease it for only $400 a month (total payments of $19,200), but you'll probably have to pay another $8,000 to keep it and if you finance that $8,000, you'll pay even more.
- Most leases charge you as much as 25 cents per mile if you exceed the annual mileage limit usually between 12,000 and 15,000 miles. If you drive extensively, leasing probably isn't for you.
- It's very expensive to break a lease early. If you no longer want or can't afford to keep your car for example, because you lost your job or your financial situation changed you will have to pay a hefty early termination fee.
- If the car you lease turns out to be a lemon, in most states the leasing company has to do the complaining (remember, you don't own the car) in order to get redress. California is one state that doesn't follow this rule. (For information on laws protecting you if you buy or lease a lemon, see Nolo's article Lemon Law for Used Cars.)
- Leasing companies often require you to purchase very high levels of insurance, which can be expensive.
Getting the Facts Before You Lease
Before you lease a car, make sure you know what the final cost will be. The federal Consumer Leasing Act requires lease agreements to include, among other things, the total amount due, a statement of costs (such as the number and amount of regular payments), insurance requirements, and any penalty for defaulting on lease payments. Multiply the total monthly payment times the number of months in the lease to see what the approximate final cost will be.
Unfortunately, the law does not require the dealer to disclose all leasing costs. In addition, many lease agreements are ambiguously drafted with key provisions buried in the fine print.
If you want to lease, you should be diligent and read all the fine print. Read "Keys to Vehicle Leasing" by the Federal Reserve Board available at www.federalreserve.gov. Ask a lot of questions and get the answers in writing. If you want to know the interest rate on the lease, ask the dealer for the "money factor" or the "lease rate." Multiply that number by 24 and you'll get the approximate interest rate.
Your lease agreement will specify who must pay for maintenance and repairs during the lease term. In addition, the agreement should come with a manufacturer's warranty. Ideally, it will cover the entire length of the lease and the number of miles you are likely to drive.
Most lease agreements require you to pay for excess wear and tear. This means that when you return the vehicle at lease-end, the dealer could charge you to fix anything deemed excessive by the lease agreement. Read this portion of the lease carefully. After all, every car is going to have a little wear and a few nicks after three or four years' use, and you want to be sure that the wear and tear standards are reasonable.
Gap Insurance
Look for a deal that includes "gap insurance" or waives "gap liability." If the vehicle is stolen or totaled, gap insurance will pay the difference between what you owe under the lease and what the dealer can recover for the vehicle a difference that could amount to thousands of dollars. Some leases waive gap liability.
Getting a Good Deal
The lease deals that are heavily advertised by car manufacturers are often the best. They usually offer low monthly payments or a high turn-in value for the vehicle at the end (so that you're not paying for a lot of depreciation during the lease term). In addition, many offer to lock in the price you'd have to pay at lease-end if you want to keep the vehicle.
However, to get these good deals, you cannot deviate from the advertised terms. If you want air conditioning, a larger engine, or any other feature that's not in the ad, the dealer will throw out the entire lease offer and you could end up paying more.
You can also explore financing a lease through someone other than the dealer. A number of independent companies offer leases look for these companies in the Yellow Pages under Automotive Leasing. Or check the Internet. For example, the National Vehicle Leasing Association (at www.nvla.org) provides a state-by-state list of both dealer and independent leasing companies. Also, if you belong to a credit union or AAA, ask about the possibility of financing your lease through them.
Although shopping in the fall is usually a good way to get a good deal when buying a new car, the opposite is true for leases. Because dealers have lost money on cars sitting in their lots, they often increase the monthly lease payments to make up for lost revenue.
Canceling Your Lease Agreement Early
Usually, you cannot cancel a lease agreement before the end of the term, unless you're willing to pay a substantial penalty. If you want to cancel your lease, look carefully at the provision describing what happens if you default or want to terminate the lease early. Ask the dealer or lessor to calculate how much it would cost you to terminate the lease early.
To learn more about leasing a car, see Nolo's Encyclopedia of Everyday Law, by Shae Irving and the editors of Nolo.