How to Lease a Car in 7 Steps and When Leasing Is a Good Idea

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Knowing how to lease a car is important - that knowledge will get you the best deal at the best price. But just as important is knowing when the time is right to lease a car, truck or SUV.

That's right - timing can be everything in a vehicle leasing deal. If you can get both the knowledge and the timing down pat, chances are you'll walk away with a great auto lease deal.

The fact is that most consumers have little idea how leasing really works, what some of the hidden costs are, or how to land the best deal. Additionally, many people who lease their cars are overpaying because they didn't fully understand the concept of leasing, so they're not equipped to make a better deal (or to recognize a bad deal).

The good news is that auto leasing does make sense in many situations (especially if you're looking for low upfront and monthly payments costs.) To cut the best deal, however, there are some additional costs and issues to factor in before you sign on the dotted line.

What Is a Lease?

Auto leasing is simply a way to get into a new car, truck or SUV without having to buy it.

When a consumer leases a new vehicle, he or she is cutting a special deal with an auto dealer. Instead of buying the entire vehicle lock, stock and barrel, the lease buyer pays for any depreciation incurred over the entire cost of a lease (usually two or three years), plus any fees and costs incurred within the leasing period.

The buyer may have to put some money down at the signing of a lease, but it's not as much of a down payment as when you buy a vehicle outright (which often requires a 20% down payment.) Better yet, it's perfectly acceptable to ask the dealer not to make any down payment, and thus free up a few thousand dollars you can use to make your monthly lease payments. 

Auto leasing consumers should also familiarize themselves with two key auto financing concepts - capitalized cost and residual value.

  • Capitalized cost: Basically, this is the going price for the vehicle you want to lease. Just like when you buy a vehicle, you can (and should) negotiate the cap cost just as if you were purchasing the car outright.
  • Residual value: This is the likely value of the vehicle at the end of the lease and is almost never up for bargaining.

By and large, the cash you pay for a leased car, truck or SUV represents the cap cost minus the residual value, with interest and fees added into the price. Let's say you're leasing a Cadillac with a cap cost of $36,000 and a residual value of $22,000 three years from now. In that scenario, the lease buyer is on the hook for $14,000, plus interest and fees.

Make sure to compare the differences between buying and leasing before you make your final decision. There is no one-size-fits-all solution and each option has distinct pros and cons.

How to Lease a Car in 7 Steps

What's the best way to successfully navigate the auto leasing experience? Plug in these tips to land the best deal:

1. Decide What You Want in Advance

The smart move is to be fully prepared for a lease deal before you hit the dealership, or if you plan on leasing online. A review of your monthly payment will tell you what you can afford, and some upfront research at auto review sites that focus on leases (like TrueCar or Edmunds) can walk you through payments, length of a lease, and even specific vehicle miles with suggested pricing. One "must have" when you lease is gap insurance protection, which covers you in the event your vehicle is stolen or damaged in an accident.

2. Know What the Lease Will Require

While no auto lease is exactly the same, there are some universal themes running through most auto leases. For example, most auto lease contracts allow a standard 12,000 miles annually in driving miles (or 24,000 for a two-year lease or 36,000 miles for a three-year lease.) If you rack up more miles than the contract allows, be prepared to pay about 10-15 cents for each mile in excess charges. It's a good idea to weigh how many miles you'll cover on a daily, weekly or monthly basis, and factor that figure in when you're negotiating a lease deal.

3. Look for Deeply-Discounted Offers

Auto dealers often offer discounted lease deals, usually on vehicle models they want off the lot or on used vehicles. Go ahead and check for discounted deals (Edmunds.com has a good rundown of lease deals on its incentives and rebates page) but be watchful for costs added in on the back end of the deal, often buried in the contract's fine print. Or, if you have a particular dealer in mind, check that dealership's website, where discounts and deals can easily be found.

4. Negotiate the Selling Price

When you decide on the auto make and model and have a time frame and price in mind, get down to the dealer and start negotiating. Again, it's perfectly acceptable to negotiate the sales price (cap cost) just as you might if you're buying a car. If you're offered the manufacturers retail sales price (MSRP), reject the offer out of hand. That's the price the dealer would love to see you pay, but the fact is, you can do better. Tell the dealer you're open to a fair deal, but since you're leasing, you certainly don't expect to pay full price. Ask for a price break and you'll likely get some traction with the dealer.

5. Avoid Dealer Mark-Ups

When you're negotiating with the auto dealer, take particular care to avoid any interest rate mark-ups. The mark-ups, also known as the "money factor", can be negotiated downward, especially if you have solid or sterling credit. The key? Ask for the "buy rate", i.e., the unmarked-up interest rate on the vehicle. The cost is significantly lower, and if you show you're a serious consumer (here's where you may offer to put money down on the vehicle) the dealer will be likely to work with you on the interest rate. If not, feel free to keep looking at other dealers - and let this dealer know you're ready to do that.

6. Consider a Longer Lease

If you're strapped for cash, aim for a longer vehicle lease. This will cut your monthly lease payments by 10% or more with a three-year lease versus a two-year lease, but there is a downside. The longer you take an auto lease, the higher the likelihood of wear, tear, and damage on the leased vehicle, which you'll pay for, one way or another, before you can hand the vehicle back to the dealer. If you're a careful and maintenance-oriented auto buff, you can come out ahead by taking a longer lease.

7. Check the Contract Twice Before Signing

You'll get a contract that will list and detail both your obligations and the dealer's obligations. Chances are you'll be asked to sign the paperwork in the dealership's finance office, where a manager may try to sweet talk you into paying for extras and add-ons you don't need, like pricey maintenance packages, interior dash and fabric/leather protection, and vehicle security systems. Focus on reviewing the contract for accuracy's sake, noting that the figures included are exactly as you negotiated, and there are no extra charges or obligations included.

When Is It a Good Idea to Lease a Vehicle?

Pricing is a big issue when you're looking to lease a new car, truck or SUV, and in multiple ways.

  • Lower monthly payments. The upside is that your cash goes further with a lease than it would an actual vehicle purchase. Put it this way - you can either lease or buy a vehicle that's valued at $25,000. If you lease the vehicle for a period of three years, and the car's estimated value at the end of the lease is $15,000, your lease payments are based on the $10,000 variance in value.
  • Yet if you bought the vehicle outright, your monthly payments are based on the whole $25,000, which significantly steers your monthly payments upward.
  • Lower down payment. If you're really strapped for cash, a lease calls for a lower down payment (and maybe even no down payment.) The upside is getting into a newer vehicle with a $1,000 down payment, instead of having to pay $5,000 for a down payment when purchasing a car.
  • You get a new vehicle every few years. When you lease a new vehicle and return it in two or three years, you can turn right around and lease another new vehicle, at a lower monthly cost.

The Downside of a Car Lease

  • No equity. When you lease a vehicle instead of buying one, you build no equity in the deal. With no ownership stake in a lease deal, there's no opportunity to resell the vehicle, or to own a car after all the payments are made.
  • Mileage limits. When you lease a car with mileage restrictions - and all leases have them - you risk exceeding the mileage limits and having to pay extra for the lease deal. That could mean you'll be driving the vehicle less than you may like.
  • Wear and tear costs. Auto dealers are firm on another part of the auto lease deal - wear and tear. If you don't take good care of the vehicle during the leasing period, you'll incur extra charges since you did not return the vehicle in the pristine condition the dealer manager expects.