When searching for a new car, you are faced with the decision of whether to buy or lease. Determining which is the best financial choice for you is not always clear. Dealerships and manufacturers often offer incentives or subsidies can obscure the true cost of each option. Additionally, leasing and buying involve different terminology, which can make it confusing to discuss payments and overall cost with a salesperson.
To help clarify things, here is a breakdown of some important terms to know before leasing a car.
- Lessee: The person who is leasing the vehicle.
- Lessor: The company providing the vehicle for lease.
- Capitalized Cost: The price of the vehicle with all options and delivery fees, which is the amount you would pay if you bought the car outright. Often referred to as "cap cost".
- Cap Cost Reductions: Any deals or specials that reduce the cost of the vehicle.
- Residual Value: The predicted value of the vehicle at the end of the lease. This value is significant because it determines the impact of mileage restrictions in a lease agreement.
- Money Factor: Similar to an interest rate for leasing a vehicle, the lease money factor is a decimal figure (e.g., 0.0010 or 0.0025) representing part of your monthly lease payments. To make it more relatable, multiply this figure by 2,400 to get an equivalent in terms of interest or annual percentage rate (APR). It is sometimes called a "lease factor" or "lease fee."
- Mileage Charge: When you sign a lease, you agree to a maximum number of miles for the lease term. A charge is applied for each mile driven over the contracted amount.
- Excess Wear-and-Tear: Many lease agreements include provisions for any damage to the vehicle beyond what is considered typical use. The lessee is responsible for repairing such damage.
- Gap Insurance: Like any other vehicle, a leased car must be insured. Gap insurance covers the difference between your regular insurance coverage and the amount the lessor is left with if the car is totaled.
- Amortization: In some cases, additional items can be added to a lease that do not increase the residual value of the vehicle. The cost of these items is spread out over the term of the lease.
Aside from understanding the terminology, there are other factors to consider before signing a lease agreement. Here are a few noteworthy considerations:
- Ownership: When you lease, someone else owns the car (think of leasing as renting). This means you cannot make permanent changes or customizations to the vehicle without permission. For example, if you replace the wheels, you would need to keep the originals in order to re-install them at the end of the lease. It also means that you will not have a car to sell or trade in when you are ready for your next vehicle.
- Mileage Limits: Going over your allotted mileage can result in owing a significant amount of money. Mileage costs can range from ten to thirty cents per mile. Although it may not seem like much, every trip adds up.
- Restricted Use: Some lease agreements impose restrictions on where you can take the leased vehicle. One notable restriction is that you typically cannot take the vehicle outside of the United States without permission.
- Reduced Maintenance: In most cases, your lease will last as long as the warranty, which means you will not have to pay out of pocket for repairs if anything breaks. You are responsible for wearable parts, brakes, tires, and fluids.
- Sales Tax: Certain states do not apply sales tax to leased cars because you are essentially paying for the privilege of using the vehicle, not purchasing it. This can result in saving a few thousand dollars.
If it fits within your budget, leasing can be a viable option in the long run. There are many calculators available to help you determine the exact difference between buying and leasing. With the assistance of these tools and an understanding of leasing terminology, you can make the best choice for your life.
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