Car Leasing

Car leases have cheaper monthly payments than new car loans and are the primary way luxury cars are financed in the United States today. Their two major disadvantages are the fact that people who lease don’t get to keep their car at the end of the lease term and limits in the lease contract on the number of miles (generally 12,000 to 15,000) that can be driven annually without penalties. Leases generally make the most sense for drivers who buy cars every two to three years (or always have car payments), drive fewer miles than the annual limit, and take good care of cars to avoid “excess wear and tear” charges. They do not make sense for drivers who keep cars seven to 10 years or more.

Negotiate

• Compare the total cost of leasing versus buying with the "Is Leasing For You?" quiz available at www.ConsumerReports.org (Consumer Reports Online).
• Negotiate for a better lease deal than those that are advertised. For example, request a higher annual mileage limit if you have a long commute and a lower capitalized cost (similar to the purchase price of a car that is bought), which will lower monthly payments. Like car purchases, leases are negotiable.
• Follow “The Rule of Three” and compare the residual value (the estimated value of a car at the end of a lease), capitalized cost, and money factor (similar to the interest rate on car loans) for at least three different car dealers.
• Look for the term “subvented lease” in advertisements. This means that the cost of the lease is subsidized, usually by a car manufacturer. Like rebates for car buyers, these deals are usually offered on slower-moving models.

Prevent Losses

• Purchase “gap insurance” to cover the risk of having a car totaled in an accident or stolen and receiving less from an insurance company (based on its depreciated market value) than the cost of remaining lease payments.
• Avoid leases longer than three years because that is often when the warranty expires and repairs may be needed on a car you won’t even get to keep.
• Try to avoid penalties such as those charged for excessive mileage, excessive wear and tear, and early termination of a lease contract.