How to lease a car

There are many ways to get behind the wheel of a new ride, and leasing a car is one of the most common. Buying a car outright is an option, but many people don't have that luxury and have to finance a car or look at leasing. Luckily, both methods are viable, regardless of whether you're looking at new or used models. Let us shed some light on the basics of how to lease a car.

What is a Car Lease and How Does Leasing a Car Work?

When you buy a car, unless you've paid the full sum in one lump payment, you will be paying for it in monthly installments until paid up, and it belongs to you. So, how does leasing a car work? In the case of leasing, the car never actually belongs to you; instead, it is more like a long-term rental. The monthly payment is much lower than when buying and is calculated based on the depreciation of the vehicle, plus additional charges and interest. There are restrictions on leasing, though, such as an annual mileage limit, which affects the terms and monthly payments. You are also not permitted to customize or modify the vehicle in any way, and have to return it after the term is up.

Lease vs Buy - What to Remember

There are several car-lease pros and cons. Leasing might turn out to be right for you so long as you are able to live with the disadvantages. Once you have a grasp of all the pros and cons, you will be able to make an informed decision.

The Benefits of Leasing a Car

• The down payment/deposit: Often, the initial down payment required is smaller on a car lease than on a purchase.
• The monthly payments: The monthly payments will usually be lower than when buying.
• Only the best, latest models: If you want to be the driver of the latest models every few years, one of the benefits of a leased car is that you can get behind the wheel of a newer car with more features than you would be able to afford if you bought it.
• Warranty cover: Because of the shorter "ownership" period, your car is often covered by the manufacturer's warranty for the duration of the lease, which is one of the best advantages.
• No trading in or selling: Getting rid of the car at the end of the lease period is not your problem - one of the most convenient benefits.
• Incentives: Remember, there may be sales or tax incentives for leasing a hybrid or electric vehicle.

The Disadvantages of Car Leasing

• The total cost: One of the disadvantages of car leasing is the net car-lease cost. You spend more money in total leasing a car than buying it.
• The extra costs: There are more conditions and attached penalties/charges. One of the best tips we can offer is to always read the fine print.
• Depreciation: You are driving new cars all the time, at the steepest part of their depreciation curve, meaning you lose more money.
• Ownership: The car is never yours and you have to give it back when the lease period ends.
• Keep it standard: You are not allowed to modify or customize a leased car. The penalty charges for doing so are not worth it.
• Getting out is expensive: Getting rid of the car before the lease expires attracts yet more costly penalties. Your lease agreement might, for example, not permit you to take the vehicle to a city in a different state if you have to move midway through your agreement.

Be aware of all the pros and cons in the lease vs buy argument. If you want to own the latest models, leasing is great. Just remember it costs more in the end because you never actually own a car to sell again. You actually save money by buying, but your car will age and you won't be driving the latest and greatest. If money is that tight, consider buying a used car that still has some warranty left, or start by leasing a cheap new car - for example, a small hatch like a Chevrolet Spark. You can also buy the car you are leasing, but this works out more expensive than either option.

How to Lease a Car

If you've decided leasing is right for you, these are the steps you should follow to get through the process as painlessly as possible:

• You must be able to afford the monthly payment, gas, insurance, fees, etc, so work out your budget carefully
• Know your credit score; don't make the mistake of leasing with a poor score
• Determine your current car's value, so you know whether to trade it in or sell it
• Test drive the cars on your shortlist to inform your decision
• Don't just settle - visit multiple dealers and try to find the best deals when leasing a car
• Determine your monthly mileage, so you can select the right mileage cap
• Read the fine print and have your questions answered before signing the agreement

How to Calculate the Cost of Car Leasing

There are several online lease calculators available that can help you play with the numbers to see what your monthly payment will be. Enter different values to see how the inputs change your payment amount. But, in the end, you have to do the negotiations yourself and you should choose the dealer offering you the best possible deal from at least three dealers.

What are the Key Numbers Called and What Do They Mean?

There are several terms and numbers to consider when leasing, and you don't want to go into the negotiation without fully knowing the meaning of each:

• MSRP - The manufacturer's suggested retail price.
• Acquisition - The charge for arranging the lease, paid at the start. Not all lease agreements have one and some companies waive it if you negotiate.
• Disposition - This is paid at the end of the agreement and is meant to cover the costs the dealership incurs to prepare the car for reselling. The dealership will usually be willing to negotiate if you buy the car at the end of the agreement or lease another car from them.
• Buyout - This is the amount you must pay to get out of the lease early. It is lower nearer to the end of the lease.
• Cap cost - Short for 'capitalized cost', this is the car's purchase price, which is usually negotiable. It can be reduced by a bigger down payment or trading in your old car, leading to lower monthly payments.
• Lease rate - Expressed as a decimal value, you must multiply it by 2,400 to determine what percentage interest rate you are paying.
• Lease term - The lease duration. To lease a car short-term would require at least two years, but it can be leased over as many as four years if you prefer.
• Residual - The value of the vehicle when the lease expires and at which the dealership is willing to buy back the vehicle.
• Gap insurance - Your insurance might pay out less than the vehicle's residual value if you total it. Gap insurance covers the difference.
• Mileage limit - You agree to an annual mileage limit and penalties apply per extra mile driven. Remember, a cargo van for a business is likely to cover much larger distances than a family car, so keep this in mind.
• Purchase option - The amount you'll have to pay if you decide to buy the car at the conclusion of the lease agreement.

What Credit Score Do You Need to Lease a Car?

Whether you are buying or leasing, with no credit score you can't do either cheaply. Bad credit might not preclude you from leasing altogether, but you will have a smaller selection of vehicles to choose from - or some dealer might offer you a lease on a used car instead. Either way, you'll pay for bad credit, whether this means having to cough up higher fees, or having to agree that you will be responsible for the car's repair and maintenance costs for the duration of the lease period.

To give you relatively free rein in terms of leasing choices, most leasing companies have some requirements, such as having a FICO Score of 700 or higher. The better the score, the lower your financing charge and the size of your monthly payment. If you don't have the required credit score, it might be a big mistake to move forward. Rather improve your credit score and get your financial standing in order and then go back for a lease with better terms.

Conclusion

In short, buying will always save you money and, if you are fine with driving your car for several years and selling it yourself, this is a prudent option. However, if you always want to drive new models sporting the latest technology, leasing affords you that opportunity. Just keep in mind that it costs you more in total at the end, you must adhere to the restrictions, and you don't get to keep the car to sell again.