The next time you see a car you love in the showroom but can't afford the sticker price, ask the salesperson about the dealerships leasing programs. Leasing is not for everyone, but it is a way to drive off with a new car every few years for a cheaper monthly payment. If you're not familiar with how a lease works, there are several distinctions between a lease and a purchase.
The Leasing Option
If you don't keep a car for more than two or three years and want a smaller monthly payment, a lease may be right for you. You won't own a car at the end of the term, but you also won't have to deal with high maintenance costs since most cars are under warranty for the lease term.
Cheaper Cost to Drive
A lease payment is generally 30 to 50 percent lower than the monthly cost of buying a new car. But if you purchase the car after the lease is up, the car will be more expensive over the long run.
Mileage Allowance
Most leases allow for 12,000 to 15,000 miles driven each year of the term. If you exceed this allowance, penalties will apply.
Insurance May Be Higher
Drivers who lease must typically carry a higher level of automobile insurance since the car belongs to the leasing company. It's common to carry $100,000 per person or $300,000 per occurrence for liability and $50,000 for property liability insurance when leasing a car.
Residual Price
The estimated value of the car at the end of the lease period is called the residual price. The longer you have the car, the lower the residual value, when compared to the original manufacturer's sticker price.
Other Leasing Fees
There may be an acquisition fee to take delivery of your lease. This fee is a flat rate paid to the leasing company or lender, and can run several hundred dollars, according to Gerri Willis of CNN Money. At the end of the term, you may also pay a disposition fee if you decide not to keep the car.
Wear and Tear
You are allowed certain wear and tear on the vehicle. But you are responsible for excessive wear and tear determined by the leasing company or damages to the car while it's in your possession.
No Cooling Off Period
Before you sign a lease, be certain that it is the car you want to drive for the next few years, and the monthly payment is something you can afford. A lease is a binding contract. Once you sign the paperwork and drive off the lot, there is no cooling off period. You cannot turn the car in if you have a change of heart the next day.
Early Termination Fees
If you turn the car in before the lease term ends, you are responsible for fees. This could include the balance of the remaining lease payments. This includes if the car is stolen and not recovered or wrecked in an accident.
Gap Insurance
If your lease ends early for involuntary reasons such as theft or an accident you still owe the balance due on the lease. Many insurance companies will not cover the full cost of the lease; therefore, obtain gap insurance to protect you for the difference your insurance doesn't pay.
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