If you are in the market for a new or used car, it may be beneficial to research new car leasing too. It is extremely popular. Many people find they can get more car for their money with more luxuries when they lease versus buy. New car leasing has become a valuable option, and it is worth considering. Before looking for a new car lease, it is important to understand some important lease terms.
What is leasing?
Car leasing is essentially a long-term rental agreement between the Lessee (you) and the Lessor (lending company). This is an arrangement where you pay a certain amount each month for a specified period and return it upon completing the contracted term.
What do these terms mean?
MSRP– these abbreviations stand for Manufacturer Suggested Retail Price. This is the price you see on the window sticker of a new car.
Capitalized cost – this is the price of the car.
Money factor – this is used to calculate the rent charge on the lease. The money factor can be converted to an interest rate by multiplying it by 2400.
Residual value – this is what the car will be worth at the end of the lease. Higher residual values are good when leasing because it keeps your monthly payments lower.
Depreciation – this is the capitalized cost (price) minus the residual. To understand the monthly depreciation, just divide this by the lease term.
Example: Capitalized cost (price) $30,000 minus (residual) $20,000 = $10,000. Divide this by the term. If the term is 36 months, then the monthly depreciation is $277.78.
What do I pay at the beginning of a lease?
Car leases typically require the following at the start of the lease known as “drive off:”
- The first month payment
- Security deposit
- Licensing and registration fees
- Doc fees
- Acquisition fee
What is a mileage cap?
This is the number of allotted miles throughout the duration of the lease. New car leases allow for a choice of allotted annual mileage during the lease period. These annual mileages are typically broken down as follows: 5,000; 7,500; 10,000; 12,000; or 15,000 miles per year. It is possible to get more than 15,000 miles per year too. The end mileage is what matters, meaning, so long as your end miles are within the allotted parameters, then the lender won’t charge excess mileage fees.
Am I covered by warranty?
If you are getting a new car lease deal, the car will come with the manufacturer’s warranty. This is typically 3 years. Some cars have 4 year or 5 year warranty periods. Some manufacturers even offer powertrain warranties up to 10 years! It is ideal that your lease period stays within the manufacturer warranty period. This protects you from unexpected repair bills.
Who is responsible for maintenance?
The manufacturer’s warranty will cover major repairs. However, you are responsible for routine maintenance such as oil changes, tire changes, and brakes. Some manufacturers offer free maintenance, so it is important to understand which manufacturers offer this.
Do I pay anything at the end of the lease?
If you exceed your allotted mileage, it is very likely you will be charged for excess miles. Each leasing company is different, but it is typical for mileage penalties to be 15, 20, or 25 cents per mile. I have heard of some penalties being 30 cents per mile or as high as $1.50 per mile. Just make sure you read the contract to understand the mileage penalties.
Many manufacturers require you to pay for any services and repairs needed, along with replacing all tires, and paying a “disposition fee.” The disposition fee is typically between $350 – $595. This varies by each lender.