auto

4 factors to consider in car leasing

Tara Baukus MelloCar leasing is taking off again after an aggressive leasing campaign by Honda that runs through July 6 and has several automakers following suit.

But even if there are numerous car leasing deals out there, it doesn't mean that car leasing is the best choice for you. If you do decide to lease, it's important to be well aware of the full car leasing terms before you sign a contract. To see if it's better to buy or lease, use this Bankrate.com calculator.

Most people opt for car leasing so they can drive a more expensive car for less money than the monthly payment of a car loan. With many of the current car leasing deals out there, the difference in the monthly payment can be a large chunk of change.

The biggest disadvantage is that you can end up with a pretty large bill due at the end of your lease if you go over the contract's mileage limits or if you turn in a car that is in less-than-stellar condition. Other disadvantages are that you don't own the car at the end of the lease, so you literally have nothing to show for the thousands of dollars you spent over the auto lease term. And if you decide you can't stand driving the car or your driving needs change, it's usually very expensive to terminate a lease early.

If you do decide to lease, here are four things to consider:

1. The disadvantage of lease 'specials'

Many of today's car leasing deals are subsidized by the automaker to make the payments artificially low. Automakers do this by setting the capitalized cost (the price of the car) at or near the invoice price, making the residual value (the car's value at the lease end) high and offering a low interest rate (what's called the "money factor" in leasing terms).

While this makes for a low monthly payment, it means your buyout price at the end of the lease will also be high, should you decide you aren't ready to let your wheels go.

2. The down payment risk

Many car leasing deals require a down payment -- often called drive-off fees -- of $1,000 to $3,000. If the car gets totaled, the insurance company will only pay the leasing company, which means you'll be out your down payment. Instead, get the lease quoted with zero down or as little as possible.

3. Unfavorable lease terms

While the manufacturers are usually setting the terms for their car leasing deals, those terms need to suit you. Stop to consider if the length of the auto lease -- usually three years -- and the mileage limits -- usually 12,000 miles annually -- work for you.

Think about the future: What's the likelihood that your needs in a car will change or that you'll be logging more miles than you are now? If this is a concern for you, then ask about changing the car leasing terms before you sign the contract, including negotiating in more annual miles if that will be an issue. Finally, be sure you fully understand how much you will be paying if you are over the mileage limits or for additional wear and tear.

4. A car you aren't sure you love

In most instances, an auto lease is much more expensive and more difficult to get out of than simply selling or trading in a car you've purchased. Check the car leasing contract before you sign to make sure the company allows lease transfers. This is often the only affordable way to get out of a lease early. Even if a transfer is allowed, it's still wise to make sure you really like the car before you sign a contract since there's no guarantee that you'll be able to find someone to take over your auto lease.

If it's a car that can be rented, consider renting one for a few days before you make your final decision. Take the rental car or a loaner car from the dealer for several long test drives. Load your typical gear in the cargo space to make sure it fits. Test out your child safety seat because not all seats fit in all cars. The dealership salespeople may roll their eyes at you, but let them. It's your money and your set of wheels for the next several years, and you need to be sure car leasing is what you want.

Ask the adviser

If you have a car question, e-mail it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories.
 

Bankrate's content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this Web site is governed by Bankrate's Terms of Use.

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