Leasing a Car
Get key information about a car lease before you sign on the dottedline.
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Many new car drivers lease, rather than purchase, their vehicles. Although leasing can be a good deal for some people, for many it's not. Before the dealership persuades you that leasing is the answer to your prayers, you should have a good understanding of the advantages and disadvantages of a lease, where to get a good lease deal, how to get all the facts about cost, and what happens if you have to cancel the lease early.
What Is a Car Lease?
When you lease a vehicle, you don't own it. You get to use it during the lease term, for a monthly fee, but must return it at the end of the lease. In many leases, you have the option to buy the vehicle at the end of the lease. (For more information on short-term car rentals, see Nolo's article Renting a Car.)
The Advantages of Leasing
There are two main reasons people lease, rather than buy, a vehicle:
- People who like to drive a new car every few years will usually pay less by leasing rather than buying. And they also don't have to deal with getting rid of their old car -- they just turn it in at the end of the lease period.
- Lease payments are usually lower each month than loan payments for any given car. As a result, many people lease in order to drive a more expensive car than they could afford to buy.
The Disadvantages of Leasing
Although you may be eager to drive an expensive new set of wheels, consider the following disadvantages to leasing a car before you make your final decision:
- If you continually lease your cars, you will have never-ending car payments. If you look forward to paying off your car and owning it free and clear, don't lease.
- If you decide to buy the car at the lease-end, you'll pay several thousands of dollars more than if you had bought it initially. For example, if you buy a car, paying $500 a month for four years, you'll pay a total of $24,000. You might be able to lease it for only $400 a month (total payments of $19,200), but you'll probably have to pay another $8,000 to keep it -- and if you finance that $8,000, you'll pay even more.
- Most leases charge you as much as 25 cents per mile if you exceed the annual mileage limit -- usually between 12,000 and 15,000 miles. If you drive extensively, leasing probably isn't for you.
- It's very expensive to break a lease early. If you no longer want or can't afford to keep your car -- for example, because you lost your job or your financial situation changed -- you will have to pay a hefty early termination fee.
- If the car you lease turns out to be a lemon, in most states the leasing company has to do the complaining (remember, you don't own the car) in order to get redress. California is one state that doesn't follow this rule. (For information on laws protecting you if you buy or lease a lemon, see Nolo's article Lemon Law for Used Cars.)
- Leasing companies often require you to purchase very high levels of insurance, which can be expensive.
Getting the Facts Before You Lease
Before you lease a car, make sure you know what the final cost will be. The federal Consumer Leasing Act requires lease agreements to include, among other things, the total amount due, a statement of costs (such as the number and amount of regular payments), insurance requirements, and any penalty for defaulting on lease payments. Multiply the total monthly payment times the number of months in the lease to see what the approximate final cost will be.
Unfortunately, the law does not require the dealer to disclose all leasing costs. In addition, many lease agreements are ambiguously drafted with key provisions buried in the fine print.
If you want to lease, you should be diligent and read all the fine print. Read "Keys to Vehicle Leasing" by the Federal Reserve Board available at www.federalreserve.gov. Ask a lot of questions and get the answers in writing. If you want to know the interest rate on the lease, ask the dealer for the "money factor" or the "lease rate." Multiply that number by 24 and you'll get the approximate interest rate.
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