When Leasing Makes Sense

published 31 October 2006

Car buyers are naturally suspicious of leasing, and no wonder. Some critics claim that it's a mortal sin of money management to not actually own your vehicle. Plus, you need a glossary to decipher the terminology and the patience of a land tortoise to understand how the deals work.

And even mastering the vernacular may not do you much good. Dealers often balk at revealing the numbers behind the deal, so you end up having to negotiate on the monthly payment. The result: Many leasers pay too much.

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If your modus operandi is to buy a car and run it till it sputters and dies, leasing isn't right for you. But you're a good candidate if you've decided that you're always going to have a car payment -- as many drivers do now that six- and even seven-year loans are gaining popularity.

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It's a good bet that you can drive more car for less money if you lease. You'll never actually own the car, but who really owns a car when the bank holds the title until the loan is paid off?

Leasing advantages

Many leasers believe that instead of having nothing to show at the end of the lease, they've gotten the best years from a quickly depreciating asset.

A lease usually ends about the same time as the warranty, so you probably won't pay for any repairs. And you won't have to worry about whether you'll get a fair deal on a trade-in.

In most states, you pay sales tax only on the monthly payments rather than on the full value of the car. Plus, many of today's leases include gap insurance to cover the difference between the lease payoff and an insurance settlement if the car is totaled or stolen.

Yes, there are early-termination fees if you change your mind. But if you finance a car and bail out before the loan is paid off, you could easily owe more on the loan than the car is worth. And it's true that leasers pay extra for exceeding the 10,000- to 15,000-mile yearly limit typically written into a contract. But buyers who rack up high mileage also pay a penalty: lower trade-in value.

Design your own lease

If you choose a manufacturer-subsidized lease, you'll probably be locked in to the terms. But if the car you want isn't being pushed by the carmaker, there's plenty of room for bargaining. Either way, contact several dealers to see who's willing to cut you the best deal. A term of three years is popular because that's often the turning point in a car's life (when the warranty expires, for instance, or you may need new tires).

Ask the dealer to compare leasing offers on the car from the manufacturer's financing arm as well as a few banks. That may produce a lower money factor (basically the interest rate) or higher residual (the value of the vehicle at the end of the lease), either of which translates into lower payments.

Next, target the capitalized cost -- leasing lingo for the price of the car written into the lease. Gross cap cost includes the price of the vehicle, fees, extended service plans, gap-insurance premiums and any other add-ons. Adjusted cap cost is the gross cap cost minus reductions for trade-in, down payment and rebates.

The adjusted cost is the amount you actually finance. Don't pay sticker unless you have to. Both Kelley Blue Book and Edmunds.com list actual transaction prices to give you an idea of what others are paying.

If you expect to drive more than the number of miles included in the standard contract, try to negotiate a higher limit. Or you may be able to buy extra miles up front for an extra 10 or 15 cents per mile, versus the usual 15- to 30-cent-per-mile penalty charged at the end of the lease.

You usually have the option of buying the car at the end of the lease instead of turning it in. The purchase amount, typically the residual value, is written into the lease. Buying may not be a good idea, though, if the residual was set artificially high to lower the monthly payments.

Get some help

Not up for haggling? Kiplinger's has teamed up with CarBargains, a buying service from the nonprofit Consumers' Checkbook organization. Its LeaseWise service will negotiate with five local dealers for you. The cost is $335. Visit the CarBargains site or call 800-475-7283.

Another option is to visit LeaseCompare.com. You start by choosing a car -- either a new model or a late-model used vehicle. Then you have two options: Shop for a lease using a market-based price for the car, which LeaseCompare.com provides, or shop for a lease based on a price you've already negotiated with a dealer.

One caveat about LeaseCompare.com: It currently doesn't provide quotes on leases offered by carmakers' so-called captive finance companies. To check out subsidized leases, go to Edmunds.com, get pricing on the car you want and click on "Incentives."

The same people run a site called LowerMyLease.com. The Web site exists to let existing leasers shop for a lower payment. At this site you can refinance your lease, much as you'd refinance a home mortgage, without having to break the lease and turn in the car, which could trigger early-termination fees. Nor do you have to find another person to lease the car and take over the payments (a process called lease assumption), which could also involve hundreds of dollars in fees.

Here's how the process works: From the pull-down menus, select your model and the lender for your existing lease. The phone number of the lender is supplied, so you can call and get the lease's current payoff. Then you pick a new lease, assuming you find a better deal.

You may be able to lower the payment, shorten the term with the same payment or get the same term but with a lower payoff. After you qualify for the new lease, the service sends you a new contract and pays off your old lease.

Current leasers aren't the only ones who can use the site. If you're still making car payments, the service will even buy your car from you and write a lease on it.

Mark was the editor of Kiplinger's Personal Finance magazine from July 2017 to June 2023. Prior to becoming editor, he was the Money and Living sections editor and, before that, the automotive writer. He has also been editor of Kiplinger.com as well as the magazine's managing editor, assistant managing editor and chief copy editor. Mark has also served as president of the Washington Automotive Press Association. In 1990 he was nominated for a National Magazine Award. Mark earned a B.A. from University of Virginia and an M.A. in Writing from Johns Hopkins University. Mark lives in Washington, D.C., with his wife, and they spend as much time as possible in their Glen Arbor, Mich., vacation home.