Step-by Step Basic Guide to Leasing a Car

steps to car leasing1. Understand how car leasing works

The most common reason that automotive consumers become unhappy with leasing or have bad experiences is that they were attracted by the low monthly payments but didn’t actually understand how it works — and that leasing is only right for people who don’t drive more than an average number of miles, take good care of their cars, properly repair any damages, won’t want to customize their cars, and won’t want to end their lease early. Leasing is often confused with renting, which it is not, which leads to unfortunate misconceptions and mistakes.

Clearly, the best place to learn about car leasing is right here at Start with our easy-to-read Leasing Guide.

2. Always know your car’s pricing data

Before visiting a car dealer, know all essential pricing information about the car you intend to lease. This includes MSRP (sticker price), invoice price, and market price (what other people are paying). It’s easy enough to get. Although car company web sites usually have basic MSRP data, you won’t find invoice prices or market prices there. For full pricing information, you’ll need to use online sources such as Edmunds.

The reason price is so important in a car lease is that it affects the monthly payment and is the ONLY component of a lease that is negotiable. All other components such as money factor and residual percentage are set by a dealer’s lease finance company, which is usually the “captive” finance company owned by the car manufacturer — such as Ford Credit or Honda Financial. You may be able to adjust (not negotiate) money factor with a higher down payment, or change residual value by accepting a different mileage limit.

Don’t be surprised if a dealer’s MSRP prices are a little higher than you found online because he may have added items to the car that provide him greater profit, but add little or no benefit to most customers. These might be window etchings, paint sealant, fabric protectant, rust proofing, or expensive floor mats. If the items have already been installed and can’t be removed, you can attempt to negotiate the inflated prices being charged.

3. Know how to determine payments from lease price

If you go into a car lease negotiation only knowing what monthly payment you want, you are at a huge disadvantage (see our article Don’t Be a Payment Buyer for more details). By the time you enter into negotiations with a dealer, you should already know how lease payments are calculated and, generally, what price car will produce the payments you want (see How Much Car Can I Lease? for more details). Always negotiate the price of a vehicle first, then determine what lease payment amount it produces, either letting the dealer do the math, or doing it yourself using an online lease calculator on your smartphone or tablet.

Ask the dealer what money factor and lease-end residual he’s using. Also ask about any fees or charges — such as a “doc” fee and acquisition fee that have been added to the negotiated price of your vehicle. If you use exactly the same numbers as the dealer as input to your calculations, the monthly payment number will be exactly the same as his. If there’s any difference is because the dealer hasn’t given you the real numbers he’s using.

4. Be able to evaluate any lease deal offered to you

It’s one thing to be able to relate car price to monthly lease payments, but knowing whether the deal is good is another matter. Of course, a good vehicle price is part of a good lease deal, but there are other factors that affect a deal. A great price combined with a high residual value, and/or low money factor makes the best overall deal.

If you have nothing much more that a monthly payment, you can evaluate the deal with our Lease Deal Calculator. If you have more detailed information and need a more accurate answer, use the Lease Evaluator or Lease Inspector in our Lease Kit.

5. Check for special lease offers from car manufacturer

Car companies regularly offer national or regional “subvented” lease deals on selected vehicle makes, models, and styles (“trim levels”). These promotional deals usually last only one month, after which the deals can be extended, modified, or simply withdrawn. Always check to see if such a deal is being offered for the specific vehicle that you want. You can check the car company web site, under “Shopping Tools” in the menu, and then under “Special Offers.”

You can also check our sister web site, Best Car Deals, for current information on lease specials.

Subvented lease deals from car manufacturers are nearly always excellent deals — better than independently negotiated deals by customers — because lease price has been lowered, money factor has been reduced, and residual percentage has been raised, all of which make for a very low lease payment for that particular vehicle.

If you can’t find a special manufacturer’s deal for your vehicle, you’ll have to resort to old-fashioned haggling — for best price, of course, since you can’t negotiate the other factors of a lease that have already been locked by the lease finance company.

6. If you drive over 12,000 miles per year, buy extra miles

If you drive no more than about 20,000 miles a year, leasing can still be a viable financing option for you — if you arrange for the extra miles you need at the beginning of your lease. Typically, it’s less expensive than paying an excess mileage fee at the end of a lease. The extra miles are charged at a per-mile rate, usually about $0.15 a mile (higher for luxury cars), and the total amount is subtracted from the normal residual value. As a result, your monthly payment increases a bit.

If you drive more than 20,000 miles annually, leasing may not be a good financing solution for you — because the cost of leasing begins to approach the cost of buying, making leasing less practical. Furthermore, high mileage leases means that the car will not be covered by manufacturer’s warranty for the full lease term, and the likelihood of excessive wear-and-tear is greater.

7. Don’t buy add-on products in the Finance Manager’s office

Once you’ve settle on a lease deal, you’ll visit the Finance Manager to sign papers. However, it’s part of the manager’s job to try and sell you add-on extra-profit items such as credit insurance, security systems, extended warranties, wear-and-tear insurance, paint sealant, and more. Some of these items may be of some value to you but the price is usually excessive. Don’t buy them. If you’re interested, you may be able to find them cheaper elsewhere. If such add-on products have already been added to the car by the dealer or distributor, you can refuse to pay for them, or negotiate a better, more reasonable, price.

8. Read your lease contract before you sign

Check your lease agreement to make sure all the numbers make sense to you and that nothing extra has been added. If you have questions, ask and get answers. Don’t feel pressured to sign before you’ve read everything.  Ideally, you would already be familiar with lease contracts and know what to look for. Our Lease Kit contains a sample lease contract and a comprehensive contract checklist.

9. Enjoy your car but understand your obligations

You signed a legal contract that obligates you in a number of ways. It specifies who can drive the car, what insurance you must carry, how the car must be maintained, what to do in case of an accident, how many miles you are allowed to drive without penalty, how much wear-and-tear you are allowed without penalty, what constitutes a “default,” and how a “payoff” will be calculated if you decide to end your lease early. Keeping these things in mind during your lease will make things go a lot smoother at lease-end.

10. Consider your lease-end options

The beginning of a lease is not too early to begin thinking about what you plan to do at the time your lease ends. Your options will be to 1) return your car to the lease company, or 2) purchase your vehicle from the lease company. If you know up front that you will choose to buy your vehicle, then there’s no need to be concerned about excessive mileage or wear-and-tear during your lease term.

Quick Video That Explains the Basic Concept of Leasing

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