How to Lease a Car

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November 9, 2016

With no knowledge of why or how to lease a car, many drivers end up buying a car they would be better off leasing. Learn how to lease a car in 5 steps.

Learning how to lease a car isn't complicated. Lease options make it easier to acquire a vehicle without the problems associated with ownership. People who choose to lease find the flexibility associated with having a new or newer pre-owned vehicle is key to their decision. These steps outline some of the ways you should go about leasing a car.

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  • Find the vehicle. First, you should find the vehicle that you are looking to lease. Determine if the desired vehicle has a lease option available and if there are any limitations. This is important because it would be difficult to move to negotiate a lease option on a vehicle where such an option does not exist.
  • Review lease options. After you select the car, inquire about the options on the lease. Find out if there is an opportunity to purchase additional miles for the vehicle to avoid mileage penalties. You may enjoy the vehicle during the lease term and decide at the end that you want to buy it out for ownership. Understanding the availability of such an option at favorable terms can be useful in your decision making process.
  • Understand the terms of the lease. The terms of the lease factor into the price you will pay for the vehicle. Consider such variables as lease incentives, number of lease years and the amount of down payment or pre-payment that will influence costs and help hold your monthly expense down.
  • Sign the lease contract. Once you have completed these steps, you should be in a position to sign the lease agreement and take possession of the vehicle. Be sure to read the fine print and in the case of a pre-owned vehicle or a car whose lease you are taking over, have a thorough inspection performed. The acquisition of a pre-owned vehicle is subject to the same state lemon law protections as cars purchased new from the dealer.
  • Determine what to do at the end of the lease. At the end of your lease you probably have four options: return the car, buy it, trade it or extend the lease. If you return the car, you have to pay excess mile usage and any damages other than normal wear and tear. If the car has built-in value, you may want to buy it to avoid losing your investment. Compare the residual value with the price you can buy it from the leasing company for. If it's at or around that value you may want to purchase it. See if you have any trade-in options before you make any decisions.

Lease Term Types

Some of the terms and factors associated with car leases may be a little vague and confusing. Once you find the car you would like to lease, the terms of the lease are probably the most misunderstood parts of the lease.

A few terms to watch out for and understand when leasing a car: residual value, open vs. closed lease, lease term length, mileage, fees and payments and depreciation.

  • Residual value. The residual value of the vehicle has a huge impact on the final price of the car when you lease it. It refers to the price of the vehicle that the owner expects to sell the vehicle for when it's at the end of the lease period. The higher the residual value, the lower your lease payments. However, if the residual value of the car is high, that's the price you'll be paying if you decide to purchase the car at the end of your lease.
  • Open or closed lease. An open lease is mainly used for business (commercial) purposes. The lessee pays for the price difference between the residual value and the resale value at the end of the lease. In a closed lease, the lessee only pays for extra mileage and any damages done to the vehicle. Most lease types will be closed, providing you a better value.
  • Lease term length. Most leases are for 24, 36 or 48 months. The price per month differs depending on the length of the lease. The shorter your lease, the lower the price. The longer your lease, the higher the price per month. This is because on shorter leases, there is less wear and tear on the vehicle. Make sure you ask about a bumper-to-bumper warranty and don't extend your lease out past this date.
  • Mileage limits. When you sign into a lease, you'll be subject to a limit on how much mileage you can put on the vehicle. Most standard leases are set at 12,000 miles per year, but it is worth it to purchase the extra mileage, especially if you think you will go over the standard mileage. If you drive in excess of the mileage set forth in the lease, you'll have to pay extra when the lease expires.
  • Fees and payments. When leasing a vehicle from a dealer, there are usually fees added on, such as an acquisition fee. You can sometimes negotiate these payments down lower than what they offer or even sometimes negotiate them completely out of the lease. Some dealers will also ask for a down payment.
  • Depreciation. Because of the depreciation on the vehicle, you might be able to claim it as a deduction, so check with your tax adviser before you lease.

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