Five Myths About Leasing a Car

(Image credit: Getty Images)

published 2 October 2013

Leasing often gets a bad rap. And no wonder: Its confusing terms sound like fodder for a course in high finance, and dealers have been known to slip bad deals past confused car buyers who simply wanted low monthly payments.

About 30% of new-car transactions are leases, but I'm convinced that more people should be leasing. As manufacturers figured out that the cash rebates they offered were hurting resale values, and as the credit spigot began to flow freely again, carmakers shifted incentives from rebates to low-interest financing and leases. If you know what you're looking for and negotiate smartly, you can save money by leasing and disprove the five myths below.

1. Leasing is a bad deal. In general, if you keep a car well past the day the loan is paid off (or if you pay cash to begin with), you'll save money by buying. But if you trade in your car before the loan is paid off, the value of the trade-in is unlikely to cover the remaining balance on the loan. And if you shop -- and negotiate -- as hard for a lease deal as you would for a purchase, you can come out ahead by leasing.

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Say you negotiate to buy a 2013 Nissan Altima 2.5 S (sticker price: $23,365) for invoice price -- $21,403 -- with 10% down and a five-year loan at 2.9%. But after three years you decide you want a new car. If you trade in the Altima, you will likely get about 46% of the sticker price, or $10,621 (the resale value after three years, according to the Kelley Blue Book). Then you'll have to pay off the loan. Figure your total out-of-pocket cost will be $9,525.

But if you lease that new Altima for three years, your monthly payments will be $179 with a $1,820 down payment (Nissan has been offering subsidized leases on the 2013 Altima). When you turn in the car at the end of the lease, you'll just walk away (unless you go over your mileage allotment or have unusual wear and tear). Total out-of-pocket cost: $8,264. In this case, leasing would leave you $1,261 richer.

In most states, you pay taxes only on the actual lease payments, so leasing can put you even further ahead (see number 3 below). Plus, you typically don't have to bring cash to the table for a lease.

2. It's nearly impossible to negotiate a good lease. Almost every facet of a lease is negotiable. But first you need to understand the jargon:

Capitalized cost. In the leasing universe, this is the vehicle price. You should haggle over this figure just as hard as you would haggle over the price if you were buying.

Money factor. The lower this number, the better (you have to multiply it by 2,400 to get an estimate of the interest rate). Dealers are sometimes reluctant to reveal the money factor, so be persistent.

Residual value. This is the value of the car or truck at the end of the lease.

An inflated residual value lowers your monthly payments, but it can also handcuff you. A more realistic residual value will make it easier to sell the lease, trade your vehicle in the middle of the lease or buy the vehicle at the end of the lease, says Tarry Shebesta, president of LeaseCompare.com.

Shop for your lease at the dealer, banks and credit unions, focusing on the money factor and the residual value. (No matter who writes your lease, you’ll have to haggle with the dealer over the capitalized cost.) You can also go to LeaseCompare.com to comparison shop and apply for a lease. Or check out LeaseWise. For $350, the service will shop at least five dealers in your area.

3. Only businesses get a tax break. Tax laws allow businesses to deduct monthly leasing payments as an expense.

But individuals get a tax break, too. In most states, you pay sales tax only on the monthly payments, not the vehicle price. In the Altima example above, you'd owe taxes on about $8,264 in payments rather than the $21,403 vehicle price. (Arkansas, Illinois, Maryland, Oklahoma, Texas and Virginia charge sales tax on the entire price.)

4. You will have to pay hefty fees when you turn in the car. The typical annual allotment of 10,000 to 15,000 miles is stingy, and the 20- to 25-cents-per-mile penalty for exceeding the limit seems daunting. But if you buy a car, you're also penalized for higher-than-average mileage when you trade it in.

You may be able to negotiate a higher mileage limit in exchange for a higher monthly payment and still save money.

5. If you want out early, you're stuck. Several fee-based Web sites, including LeaseTrader.com and Swapalease, match people who want to get out of a lease early with those who want to assume a short-term lease. At LeaseTrader.com, you pay a fee of $90 to post your vehicle and $250 to complete the transfer of the lease.

Anderson has been with Kiplinger since January 2004, when she joined the staff as a reporter. Since then, she's covered the gamut of personal finance issues—from mortgages and credit to spending wisely—and she heads up Kiplinger's annual automotive rankings. She holds a BA in journalism and mass communication from the University of North Carolina at Chapel Hill. She was the 2012 president of the Washington Automotive Press Association and serves on its board of directors. In 2014, she was selected for the North American Car and Truck Of the Year jury. The awards, presented at the Detroit Auto Show, have come to be regarded as the most prestigious of their kind in the U.S. because they involve no commercial tie-ins. The jury is composed of nationally recognized journalists from across the U.S. and Canada, who are selected on the basis of audience reach, experience, expertise, product knowledge, and reputation in the automotive community.