When you purchase a car, you pay the full agreed-upon price at the time of sale, whether out of pocket or with car loan proceeds.
Leasing a car is different.
When you sign a car lease agreement, you agree to pay for a fraction of the car’s actual cost, the portion you are expected to use over the term of the lease.
Because you are not paying for the full value of the vehicle, there is a set of restrictions you are expected to follow outlined in your car lease agreement.
Car lease agreement restrictions
Below are a number of restrictions placed upon people who lease a vehicle, according to CBS News:
- Costs more over time. When you purchase a car and keep it past the time it is paid off, the overall cost of operating that vehicle is spread over a longer period, making each year of ownership a little less expensive.
- Mileage is limited. When you lease, you can typically only drive about 12,000 miles a year, without being charged excess mileage fees of 10 to 25 cents per mile.
- You cannot customize. The leasing company wants the car to come back looking like it did the day it left the lot.
- Charges for excess wear and tear. Issues like scratches, door dings, and wear on tires and brakes will be charged to you.
- Early termination penalty. A car lease agreement is written in a way that discourages you from bringing it back early. Normally, there’s a hefty penalty.
Car lease agreement terms
There is no part of that auto lease that you cannot haggle over, including:
- Capitalized cost. This is the cost of the vehicle — the amount a dealership will try to convince you is the “bottom line.” It is not the bottom line, and you should negotiate it down just as you would if you were pulling cash out of your pocket to pay full value on the car.It is tempting to believe that all that matters is the monthly payment, but that is not true. If, sometime during the lease, you decide you want to buy the car outright, you will be glad for the lower capitalized cost.
- The money factor. Money factor refers to the finance rate for the auto lease. The lower the money factor, the lower your monthly payment will be and the less you will pay in finance charges over the life of the lease.Money factor is similar to the interest on a loan, but expressed in a different way. It will look like a very small number, like .00265. In order to figure out what your actual interest rate will be, you need to multiply that number by 2,400. In this case, it would be .00265 x 2400 = 6.36 percent.
Do not expect your salesperson to understand how money factor works. According to LeaseGuide.com, some will mistakenly quote the money factor as the interest rate. As long as you know to multiply by 2,400, you can do the math yourself.
- Residual value. The residual value is how much the dealership tells you the vehicle will be worth at the end of the lease. They likely will inflate this number to bind you to the lease. An inflated residual value makes it difficult to sell the lease midway through, to trade your vehicle for another before the lease ends or to buy the car outright at the end of the lease.Negotiate for a more attractive residual value before signing your name on the dotted line.
You have the advantage when you take your time.The greatest leverage you have as you shop for a car lease is the ability to get up and walk out of the dealership.
If you are without a functioning vehicle or have waited until a previous lease is about to expire, you have less bargaining power. Give yourself time to shop around. Visit websites to comparison shop.
Keep the negotiating power in your hands by not needing a new car right away.
CALCULATOR: Leasing vs buying a car