Leasing a New Car

Lease terms

There's a couple terms you need to know before you walk into the dealership:

• Adjusted capitalized cost: This is the sticker price of the car minus any additional deals you managed to get out of the dealer. It's the actual buying price, not the manufacturer's suggested retail price.
• Residual value: As long as you didn't paint a number on the side of the car and enter it in a demolition derby, this is probably how much the car will be worth after your lease ends. Most cars will have a residual value of 50 to 58 percent for a 36-month lease, but you can find out more specifically from a dealer or bank.

Make sure you put on your best negotiator hat to get that adjusted capitalized cost down before you sign a lease. A lower “cap cost” will also mean a lower lease payment. Residual value, on the other hand, isn't really negotiable in the same way, but definitely do your own research to make sure your lease payment lines up.

Interest costs

If you get a loan, you can't escape interest. It's true for home loans and bank loans, and it's true for car leases, too. After all, you're basically borrowing somebody's car for a few years, so you're probably going to pay more than just the basic depreciation of the vehicle. Here are the two terms you'll want to know:

• Money factor: The temptation upon seeing the “money factor” a leasing company gives you is to celebrate. A number like .00375 must mean a nearly nonexistent interest rate. But here's the catch: you'll need to multiply your money factor by 2400 to get your actual annual interest rate. So that .00375 would actually come out to an annual interest rate of 9.048. That's quite a bit bigger.
• Lease charges: All your additional charges, including interest, will be wrapped up in your lease charges. If the dealer quotes you $5,000 in lease charges on a 48-month lease, you should ask how much of that is interest charges. If $4,400 is interest charges, you can divide that by the 48 months and see that you'll pay $91.67 per month in interest.

Everybody's heard of double-talking car salesmen, so stay wary and do your own calculations when you get home — don't take their own calculations at face value. If a dealer is trying to rush you into making a decision on the spot, just pack up your checkbook and mosey on down the road to the next dealer.

Upfront costs, gap insurance and other fees

There are going to be several upfront costs to keep track of — usually these are called either “lease-inception fees” or “drive-out costs.” Keep an eye out for these:

• A security deposit that may be refunded to you at the lease's end, less any mileage, damage or other charges
• Acquisition fee, likely ranging from $600-$1000, paid to the leasing company
• Documentation, registration, license, tag and title fees
• The first month's lease payment

Next up is going to be sales tax. Now, there's not much you'll need to do about sales tax other than find out what it is for your state and factor it in upfront so you'll know how much it'll add. You won't be able to negotiate it or waive it or anything like that, so it's mostly just for your knowledge.

While you're at it, watch out for mileage charges, too. If you've never leased a car, this might seem weird, but you're only allowed to drive the car a certain number of miles per year. Yes, that's right — there's a mileage limit. Usually it's something in the ballpark of 15,000 miles, which covers most people's normal driving habits with plenty to spare. All the same, it's something to note before you sign a lease. If you're the type of person who goes on regular business trips in your car, for instance, you might want to figure out whether the mileage limit will work for you beforehand and either buy extra mileage upfront or get a lease with a higher mileage limit so the cost doesn't get tacked on at the end.

Lastly, just because you don't own the car doesn't mean you should skimp on the insurance. Really, it's when you don't own the car you're driving that you should be most interested in the insurance. You don't want to get stuck finishing out the payments if the car gets stolen or wrecked long before the lease is even up. That's where gap insurance comes in. Normal insurance costs won't cover the remaining payments, but gap insurance will, and usually it's not even that expensive. If you're leasing a car, gap insurance is a must.

Monthly and total payments for sample 24- and 36-month leases

Most leases last either 24 or 36 months, and there are legitimate reasons for picking either. If you want to swap cars at the same rate you swap out your phone, go with the 24-month option; but if you'd rather have lower monthly payments, you might want to think about the 36-month option.

We've cooked up a table to illustrate the difference between a two and three-year lease for you:

Monthly payments are higher when you buy a car with a loan than they are when you lease one. Of course, when you buy a car, you've bought a car, so once that loan is over, you'll have a car to show for it. With a lease, you don't. So as tempting as lowering the monthly payments even further by extending the lease past 36 months might be, you probably shouldn't do it — unless there's something strangely appealing to you about the idea of paying for repairs and maintenance on a car you don't even own because the warranty ran out.

Not trying to be hurtful here, but that car you're leasing will lose value just by you driving it. That's why some leases include “cap cost reduction,” which is basically a fee that pays off some of that depreciation in value upfront. On the plus side, it also reduces the principal you'll repay over the life of the loan and lowers your monthly payments.

Since your ability to lease a car will depend upon your credit rating, you may want to read about protections against credit discrimination through the Consumer Financial Protection Bureau. If your credit is in bad shape, and you're looking to rebuild it, check out the Repairing Your Credit podcast.