The Basics of Leasing a Car

Leasing a car is an alternative to purchasing a car. Leasing offers the convenience of driving a new car without the long-term commitment and financial responsibility of owning it. It is similar to renting an apartment, where you pay for the time you use it. It is still a loan, and acts like one in many respects. 

When the lease is over, the car is returned to the dealer. At that time there may be fees that have to be paid, such as for damage to the car or for extra miles driven over the limit. You may also have the choice to purchase the vehicle at a predetermined price, known as the residual value. 

There are two components to lease costs. One is the monthly payment for the lease. The other is the fees for leasing, These often are paid before the lease is complete. These include:

• a down payment, which is your initial payment that is applied to the price of the car. It reduces the amount you finance, much the same as when you purchase a car. It is recommended that this be negotiated away.
• the acquisition fee, sometimes called the bank fee. This is the money charge for the company to set up the lease. It is essentially a paperwork fee. It is not likely that this can be negotiated.
• a security deposit, which might be required. It is about the same as [latex]1[/latex] month’s payment for the lease. The deposit is returned to you if the car is in good shape at the end. This can be negotiated away.
• disposition fees, which cover the cost the company will incur when they take your car back and are typically between [latex]$200[/latex] and [latex]$450[/latex].
• the title, registration, and license fees, just as with the purchase of a car.
• sales tax, which will likely be applied. The sales tax only covers the depreciated portion of the car (more on depreciation later) in many states. Since this depends on the state in which the car is leased, you should determine the sales tax rules for where you lease the car.

As you can imagine, this can come to a fairly high dollar amount.

You have some obligations when you lease a car. You must keep the car in good condition, cleaned, maintained, and free of anything more than minor damage. If the car is in poor condition when the car is returned, you will be responsible for the cost to bring the car to an acceptable condition. Leases often come with mileage restrictions, which limit the number of miles you can drive each year without incurring additional fees. You are also expected to keep the mileage under its limit. If you go over, you will pay [latex]10[/latex] to [latex]25[/latex] cents per mile over.

Lease Payments

Lease payments are similar to regular loan payments, but have some other details. Calculating a lease payment involves knowing the following values:

• The price of the car. This is the cost you would pay for the car after applying all discounts, incentives, and negotiations.
• Residual Value. This is the manufacturer’s estimate of the car’s value after a set period of time. The residual value is expressed as a percentage of the manufacturer’s suggested retail price (MSRP).
• Months. This is the length of the lease. Most leases are either [latex]24[/latex]– or [latex]36[/latex]-month leases, but other terms are available.
• Monthly Depreciation. The monthly depreciation is the difference between the price of the car and the residual value, divided by the number of months of the lease, and represents the monthly loss of value of the car while it’s being used.
• Money Factor (MF). This is the interest rate, but expressed in a different way for a lease. Converting from the money factor to the annual percentage rate (APR) is done by multiplying the MF by [latex]2400[/latex]. Naturally, converting an APR to a MF is done by dividing the APR by [latex]2400[/latex].

Once the monthly depreciation and money factor values are found, the payment for the lease can be calculated.