Ads enticing you to buy or lease new cars are everywhere during the holiday season and into the new year.
But not everyone can afford to pay cash for a vehicle or finance one — especially since the average monthly car loan payment in 2012 was $462, and the average price of an automobile has risen to $32,384, according to data from J.D. Power.
So if your cash is low, and you truly need new wheels, leasing a car could makes sense. Leasing is also sometimes a good deal for entrepreneurs and others who can write off a lease as a business expense.
The advantages of a car lease are that you don’t have to shell out an an extraordinarily large down payment to get behind the wheel. Plus, you get to drive a new vehicle every few years (if you want) and just keep making low monthly lease payments.
However, it’s important to remember that leasing is essentially just renting a vehicle. You have the option to purchase the vehicle after the lease term is over, or you can trade it in for a completely different vehicle based on what you need. The entire leasing process can be intimidating, so make sure you’ve done your homework before you start talking to a dealership.
Here are some important car lease terms you need to know:
Money factor – sometimes referred to as the “lease factor”, this is the interest rate you will be paying on your lease. Multiply this number by 2,400 to determine what the interest rate is. Obviously, you want this rate to be as low as possible. So make sure you’re aware of what the money factor is before you begin negotiating.
Residual factor – this is an important value to know because it might help you decide which type of vehicle to choose. The residual factor is the estimated price of the car after the lease period is over. The difference between the estimated selling price and the residual factor will determine your monthly lease payment.
Equity – the difference between the MSRP value and the fully-paid loan amount is the equity of your vehicle. This value is also an approximation of the market value of your car after the lease period is over. It’s another good number to consider when choosing the actual car you will be leasing.
Depreciation rate – the depreciation rate is an additional number you need to calculate ahead of time because it can help you when comparing different makes and models of vehicles. Cars that have a high depreciation rate will have lost a lot of their value by the time the lease period is over. Ideally, you want to lease a car with the lowest depreciation rate so that you can get a decent amount for the trade-in or invest in a vehicle that at least has a decent value.
Acquisition fees – these will vary significantly by dealership so don’t be afraid to shop around and ask what this fee is before you even start looking at cars. These are also known as administrative fees and cover the costs of credit report processing, accounting, and other administrative tasks in preparing your vehicle for sale. Just remember that dealers touting “no acquisition fees” often charge higher-than-average monthly lease payments and higher-interest financing packages. Do your homework so you are paying a fair price for acquisition fees.
Early termination – look for the details about early termination fees in the event that you do want to give up the car before your lease ends. These can be a significant cost so you need to know exactly how this fee is calculated, and what the penalties are for breaking your lease agreement. Luckily, there are also car lease exchange services, like or Swapalease.com or LeaseTrader.com, where you can get out of a car lease if necessary by getting someone else to take over your car lease.
Maintenance schedule – this is the manufacturer’s recommended maintenance schedule which can give you an idea of how much it will cost to maintain your vehicle over the lease. While some leases are covered under a warranty, you will be responsible for everything that isn’t explicitly outlined in the warranty agreement.