Leasing 101

When you're ready for a new car, leasing can be an affordable way to get into a brand new model with slightly lower risk. Before you choose a lease, however, be sure you understand the basics of the process so you can go to a car dealership armed with knowledge.

What Leasing Really Means

Leasing a car could be more clearly described as long-term car rental. You pay a monthly price that allows you to “borrow" a brand new car for an extended period of time—typically around 36 months, though this number will vary based on your dealership. At the end of your lease, you will have the choice to either buy your car, for an amount specified in your lease agreement, or turn the vehicle in.

But, like renting, there are some restrictions.

Leases typically include the following:

  • Mileage limitations
    • Usually 10,000 to 12,000 miles annually with fees for going over.
  • Maintenance requirements (e.g. regular oil changes).
  • Out-of-pocket repairs (i.e. any fixes that are not covered by your warranties or lease agreement).
  • Minimum level of insurance coverage.

When you lease a new car, you get to take advantage of warranties and protections that are offered by the manufacturer. Some dealerships also offer some great added value programs that are only available when you drive off in a new car.

Keep in mind that while you are making monthly payments, you do not own the car, so any damage you do to the vehicle during the term of the lease will most likely come out of your pocket when the lease expires.

Before Visiting the Dealership

The process for leasing a car is not much different from financing a car purchase. Here are a few steps to take before you step foot in a dealership.

Research Lease Specials in Your Area

Car manufacturers often offer lease or purchase specials, especially as they close in on the end of a year and need to make room for the next year's models.

Visit specific dealerships in your area. Set your search for a specific mile radius and see how their offers compare. While one dealer may offer a manufacturer special, another may not. You can also use Edmunds' Price Promise tool to research deals in your area.

Figure Out What You Can Afford

You can do this on your own, or use an online tool on a car manufacturer website or other vehicle-related authority. No matter where you do the calculations, be sure you're firm on what you can pay per month.

Know Your FICO Score

Many lease specials are only for customers whose credit scores are in the highest tier. Their good credit history makes them a lower risk, and they are rewarded with a better deal.

If your score isn't stellar, there are still some negotiable points that can help you walk off with a lower monthly payment:

  • Offering a higher down payment (the more cash you put down, the lower your monthly payments).
  • Lowering the annual mileage of your lease.

You can access a free copy of your credit report via any of the three major credit bureaus, but you might need to pay extra for your credit score.

Assess Your Trade-In Value

If you plan to trade in your vehicle, it's a good idea to know how much it's really worth. Services and retailers such as Carmax offer vehicle appraisals (often for free) and can give you a very accurate assessment of what your trade-in is worth.

Take this information with you, and don't tell the dealership you have it. When the discussion of your trade-in comes up, if they are offering you less than what you were appraised for, show them the appraisal document and ask them to match it.

Some dealerships will do this, some won't, but it's worth taking an extra hour out of your day to know what your car is worth.

Utilize Dealership Websites

Today, most dealerships offer the best deals when you ask for a price quote on their website. This is a safe and easy way to start your negotiations without any of the stress or pressure of a face-to-face sales conversation.

You can also communicate with multiple dealerships at once to compare offers and vehicles to narrow down which one will offer you the best price. And as stated above, Edmunds' Price Promise tool can help you receive quotes for the vehicle of your choice.

How to Lease a Vehicle

Once you've done your homework and are ready to visit the dealership, follow these steps to get the best bang for your buck and drive off the lot with the perfect ride for you.

Ask About the “Money Factor"

Car leases do not include an annual percentage rate (APR) like car purchases do, but they include what's called a “money factor." This is a very small number that functions much like an APR. It is presented as a decimal and is very rarely written out in your lease agreement.

If you want to know what you're paying each month, ask the salesperson for your money factor, then multiply that number by 2400.

Review Your Lease Before You Sign

Once you've negotiated the price you want, either via e-mail or in person, review all the paperwork before you sign anything. Make sure you understand what you're signing, as there is no turning back if you change your mind.

Also, be sure you clearly understand what will happen if you terminate your lease early.

Understanding Lease Details & Terms

Drive-Off Fees

If you have an outstanding credit score, and you find a great deal on a lease that offers you an exceptionally low monthly payment, you probably won't need to put any money down. But there is another cost built in: lease drive-off fees.

Technically not a down payment, a lease drive-off fee is a deposit you may be asked to pay up front that includes your first month's payment. If you have a trade-in vehicle, this will help off set this cost.

Insurance Protection

In addition, be sure your lease includes gap insurance. This coverage will protect you from the responsibility of paying the dealership on the value of the car if it is stolen or totaled in an accident.

Warranties & Rebates

Finally, as with buying a car, review all the warranties, rebates, and coverage offered on your new leased vehicle. Make sure you understand what “bumper-to-bumper coverage" really means and how long your coverage will last. Be sure to read up on the definitions and limitations of new car manufacturer warranties before you sign.

MOST IMPORTANTLY—before you walk away, you need to understand:

  • How much you're paying per month.
  • How many miles you are expected to drive.
  • What the penalties are for breaking your lease or going over in miles.
  • What the payout cost of your vehicle will be a few years down the road.

Make sure your dealer or salesperson is able to answer all of these questions in order to match you up with the perfect lease for your needs.

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