Auto Loan Basics, Ch. 4: Key questions to ask when leasing

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OK, you’ve decided a lease might be good for you. And you’ve hammered out a deal. But before you sign, make sure you know the answers to the following questions:

1. What is the amount due when I sign the lease?
It can be made up of payments like security deposit, titles fees, capitalized cost reduction, monthly payments paid at signing and registration fees.

2. How long is the lease?
It’s common to find 24, 36, 48 and 60 months. But you will also find odd terms — like 39 months. Make sure you keep track of your numbers; some odd-month deals may be designed to confuse you. A 39-month lease based on the 36-month residual value of the car will give you lower payments, but you’ll pay more overall. And you might be driving for three months without a factory warranty so a major breakdown could cost you big time in repairs.

3. What happens at the end of the lease?
There are two kinds of leases: open-end and closed-end. The most common is the closed-end lease in which you return the car at the end of the lease, pay any costs due and walk away or buy the car at the residual value figure stated at the start of the lease. If the car is not worth the residual value figure at that point, you’re not responsible as long as the car has normal wear and you haven’t exceeded the mileage limits. The dealer is guessing that he will get back a vehicle worth money to him (the residual value), so he takes the risk (and maybe loses if he guesses wrong). That means you pay more for this type of deal.

Open-end leases are far less common. Sometimes called a finance lease, in this case you are doing the guessing. Your payments will be lower than a closed-end deal. In an open-end lease, the residual value is set, but it’s only considered an estimate of the future value of the car — hence open-ended. If at the end of the lease the car is not worth the estimated residual value, you pay the difference. Disagreements over that fair market value — usually assessed by someone assigned to the job by the dealer — can lead to some unwanted hassles.

In both cases, read all the small print. You may think you only have to pay certain charges at the end of a lease, but there is ample anecdotal evidence of people being surprised at additional end-of -lease payments. For example, did you agree to pay a “disposal fee,” a payment you make when you give back the car? And be sure you understand exactly how the dealer decides what is “normal wear and tear” and “excess wear,” and get him to put it in writing. You can also re-lease the car (effectively leasing a used car with a whole new deal) or trade in any value left in it toward a new lease.

4. What is the free miles allowance and what happens after that?
Commonly, leases allow 12,000 or 15,000 miles before you trigger charges per mile (anywhere from 10 to 25 cents). Remember that the miles allowance is often negotiable!

5. What will gap insurance cost me?
This insurance will pay the difference between what you owe on your leased vehicle and what it is worth if it is wrecked or stolen. You can get it with the lease or ask your insurance company.

6. What is my trade-in worth and how will it be applied to the lease cost?
It may become part of the money you pay before you get into the lease, or it may help lower monthly payments. Make sure before you sign that you can see where the trade-in money has been applied to what you are paying.

7. What happens if I default and can’t make a lease payment or want to bring it back early?
Okay, so you don’t expect that to happen, and neither does the dealer. But ask! You may want to know how you can keep the car through one troubled month when you can’t pay; find out how that would be handled. But you may have to give up the lease and then you’ll face an early termination charge. Find out what that would be.

8. Can the lease be extended?
You can usually keep it going, month by month at the same price. But be sure that will not change the terms of the original lease or bring potential new costs into play when you finally turn it in.

9. What is the “money factor?”
This is what we might call the cost of the money you are putting into the vehicle — an equivalent to the interest rate you would pay on a new car. The “money factor” will be a fraction that seems bewildering and meaningless to many people. But multiply it by 24 and you will have an indication of the interest rate you are paying for the lease. That rate should be very close to the interest rate you would pay for a new car.

10. Can I lease a used car and save money?

Yes. And a used car has already lost a huge chunk of it original value, a hit you don’t have to take. But beware! The basic rule of thumb says don’t lease something too old — a car that has just come off a two-year lease may be the best bet, and make sure both the current capitalized value of the car and the estimated residual value at the end of the lease are fair — something much more difficult to do with a used vehicle. Just like buying, leasing a used vehicle means those payments will be lower!