What a lease payment buys
A lease charges you for the value the car loses while you have it, plus interest. Take a $30,000 car with a three-year residual value of sixty percent, or $18,000. You pay the $12,000 of depreciation over thirty-six months, which comes to $333 a month. On top of that comes the rent charge, set by a money factor. Multiply the money factor by 2,400 to see it as an interest rate, so that 0.0025 equals six percent. The monthly rent charge is the negotiated price plus the residual, multiplied by the money factor, which here is about $120. The payment comes to roughly $453 before tax, against about $913 to buy the same car with a three-year loan at six percent. The buyer owns an $18,000 car at the end, and the lessee owns nothing.
The limits in the contract
- Mileage is capped, usually at 10,000 to 15,000 miles a year, and each extra mile costs fifteen to thirty cents.
- Dents, worn tires and stained upholstery beyond normal wear are billed when you return the car.
- An acquisition fee is charged at the start, and a disposition fee of a few hundred dollars is due at the end.
- Ending a lease early is expensive, since you generally owe most of the remaining payments.
Who comes out ahead
Over any long stretch, buying a reliable car and keeping it eight to ten years costs far less than leasing a series of new ones, because the payments stop and the car keeps going. Leasing suits a narrower group: people with short, steady commutes who want a car under warranty at all times. It does not suit anyone whose job, city or family size may change within three years.
Negotiating and ending a lease
The selling price in a lease, called the capitalized cost, is as negotiable as any purchase price, and lowering it lowers the payment directly. Ask to see the money factor and the residual in writing, and put as little cash down as possible, since a down payment is lost if the car is totaled in the first month. At the end you may buy the car for the residual named in the contract. If used prices have risen and the car is worth more than that figure, buying it is a bargain.
Note Most leases include gap coverage, which pays the difference if the car is totaled while you owe more than it is worth. Confirm that yours does before you sign.
