Car leasing can be a puzzling concept, and I get it. Before I understood the ins and outs of it, I was in the same boat. Growing up, my late father always insisted that buying a car was the only sensible choice. However, over time, I’ve come to realize that car leasing can be a financially savvy option for many. It’s not the same as renting, as many mistakenly believe. Instead, it’s a form of auto financing that allows you to drive a new car for a set term. In this guide, we’ll dive into the world of car leasing and explore the factors you need to consider to make an informed decision. So, if you’re standing at the crossroads of buying or leasing, wondering if leasing is right for you, keep reading. What Drives Kim is here to help you navigate the journey.
Understanding Car Leasing
Car leasing, at its core, is a simple concept. You make monthly payments to drive a new car for a predetermined period. The payments are typically lower than the monthly cost of financing a new vehicle for purchase. However, there’s a catch – you must return the car at the end of the lease term.
The heart of successful car leasing is understanding how the process works and taking the time to prepare yourself thoroughly before making any decisions. It’s about using leasing to your advantage and knowing when it’s the right choice for you. As car prices continue to climb, leasing a new vehicle remains a viable alternative, even though the percentage of new vehicles leased decreased in 2022 compared to previous years.
What is Car Leasing?
At its core, car leasing is about paying for the depreciation a vehicle experiences while you drive it. The key is the difference between a car’s original Manufacturer’s Suggested Retail Price (MSRP) and its value at the end of the lease, often referred to as the residual value.
To get the best deal on a lease, you want a car that depreciates as little as possible. Different makes and models have dramatically different depreciation rates, with European and Japanese brands often holding their value better than American counterparts. This difference in depreciation is what makes some cars better lease deals than others. The best cars to lease are those whose 36-month (3-year) residuals are at least 50% (or more) of their original MSRP value. The higher the residual, the lower the lease payments.
Before we dive further into the details, let’s talk about the importance of negotiating the lease price. Many assume that lease prices are non-negotiable, but that’s far from the truth. Negotiating a lower capitalized cost, also known as the cap cost, can significantly reduce your monthly payments.
Price is Important in Leasing – Negotiate, Negotiate, Negotiate!
Don’t be misled into thinking that you can’t negotiate a lease price. Just as you would when buying, it’s crucial to haggle with the dealer to secure the best deal. The only time you might not need to negotiate is when a dealer offers a manufacturer-sponsored deal with preset terms to attract customers.
If you’re not comfortable with negotiating, you can obtain already-discounted price quotes from reputable sources like Edmunds.com or TrueCar. Personally, I prefer to hire a broker to handle the negotiations.
The price you agree upon with the dealer is known as the cap cost, which is the most critical factor influencing your monthly lease payments. Lowering the cap cost, typically a discount off the sticker price can lead to more affordable lease payments.
The Car Dealer is Not the Leasing Company
It’s important to note that the car dealer acts as an intermediary between you and the leasing company, which is often the car maker’s finance company. The dealer calculates your monthly payment based on factors set by the leasing company. Your payments will also include sales tax based on your local rates.
Pay Attention to the Money Factor
When you lease a car, you’re effectively borrowing money from the leasing company to drive their vehicle. They expect you to pay interest on the amount they spent to buy the car. This interest is expressed as a money factor, which can be converted into an annual interest rate (APR) by multiplying it by 2400. Lower money factors lead to lower monthly payments. Generally, a money factor of 0.0025 and below (the equivalent of 6% APR) is considered a good rate.
Keep in mind that money factors can depend on your credit score. It’s essential to know your credit scores before visiting a dealer. A higher credit score can qualify you for better money factors and, consequently, lower lease payments.
What it Means to Lease
When you sign a car leasing contract, you agree to make regular monthly payments, maintain the vehicle, carry insurance, and pay taxes and fees. You’re also expected to keep the car for a specified number of months, typically 24, 36, or 48. Leasing a car involves assuming many of the responsibilities you would have if you were the owner, so it’s crucial to understand what you’re signing up for.
Understanding Lease Terms
Lease terms determine the length of your lease, typically expressed in the number of months. Common lease terms include 24, 36, 39, or 48 months. While longer leases result in lower monthly payments, it may be wiser to choose a term that aligns with your vehicle’s bumper-to-bumper warranty coverage.
At the End of a Lease
When your lease term ends, you must return the vehicle in good condition, paying for any excessive damage or extra mileage. You might also have the option to purchase the vehicle at a predetermined price, use it as a trade-in on a new car, or simply return it.
Car Leasing Requires a Clear Understanding of the Process
Car leasing is a viable alternative to buying a car, but it requires a clear understanding of the process and the ability to negotiate a favorable deal. By focusing on factors like the cap cost, money factor, and lease terms, you can make a well-informed choice that aligns with your financial goals. What Drives Kim is here to help you through every step of your car leasing journey. Remember, knowledge is power when it comes to securing the best deal on your next vehicle.
Kim is a Black millennial, working full-time in managed healthcare, all while juggling the roles of a wife and a hands-on mom to her two daughters, her rainbow babies. She is the proud owner of Beauty and the Bump NYC, a platform where she shares her perspective on all the things that bring joy to her life: family, travel, cars, food, and more.
Recognizing the need to create a dedicated space for her automotive content, Kim established WhatDrivesKim.com. Here, fellow millennial moms can find authentic and valuable insights into all things car-related. Kim’s goal is to provide the real deal on cars, helping moms make informed decisions about their vehicles.
As a contributor to A Girl’s Guide to Cars, Kim extends her passion for cars by offering helpful tips and car reviews from the unique perspective of a modern working mom. With Kim, you can trust that you’re getting practical and relatable advice about the world of automobiles.
