When you are in the market for a new car, you have the option of leasing or buying a vehicle. Occasionally car manufacturers offer lease deals that on the surface seem extremely appealing because of low monthly payments. But you should thoroughly understand car leasing before you opt for this method of obtaining a new car and follow steps to ensure your lease deal is the right deal for you.
Learn about capitalized cost and money factor. The vehicle price is what is called the capitalized cost, and you should haggle over this number just as you would if you were buying the car. The lower this final number is, the lower the cost of your monthly lease payment will be. The money factor is similar to interest rate and determines the amount of finance charges over the life of the loan. This also affects your monthly payment. Get the dealer to convert this number (usually by multiplying it by 2,400) to get the interest rate. Many dealers are reluctant to provide this number. If they will not, find another dealer who will.
Get hip to the meaning of residual value and how this affects your lease payment. Residual value is the value of the vehicle at the end of the lease. The higher this value, the lower your lease payment, generally speaking. For example, if you lease a $25,000 car for 24 months and the car has a resale (residual) value of $19,000 at the end of the lease, your lease payment is figured on the $6,000 you "used up" during the lease. Ask dealers to show you deals from several finance companies so you can see how residual values affect lease payments.
Also, if your lease payment is too high compared to the average of all recent leases, you might have trouble selling your lease or trading your car mid-lease should that be necessary.
Calculate how many miles you ordinarily drive over the course of a year. Be careful to include all commuting miles, errands and trips to see relatives during the year, as well as vacations. Depending on your lifestyle, mileage can add up quickly; most car leases allow you 10,000 to 12,000 miles per year. If you exceed the limit, you will typically have to pay 18 to 21 cents per mile. You need to weigh this out-of-pocket expense against the cost of buying the car and the possible higher than average mileage and resulting lower trade-in value when you sell the car.
Get lease proposals from several dealers so you can comparison shop. Dealers are franchisees and act relatively independently from the auto manufacturers. While there may be regional or national advertising campaigns for lease deals, some dealers offer their own deals, which may be better than what is advertised. It pays to shop around.
Consider what you can deduct as a business expense if you own your own business. If the car is used exclusively for your business, you can deduct the entire cost of its operation, including depreciation up to a certain limit. If the car is used for both business and personal use, you can deduct only that portion of the miles used for business. If this is your situation, you will need to keep a careful log of your business miles. Be careful about leasing luxury cars for business. The IRS states that the cost of a luxury car is not a necessary business expense and is not fully deductible. Only the cost of an "ordinary" car is.
- Be careful about doing business with disreputable finance companies. Check out references before you sign anything. Read the fine print on any contract. If you do not understand terms, ask the dealer to explain or have an attorney advise you.
- Going over the mileage limit can result in a huge one-time cost due at the time you turn the car in. Getting out of a lease early is hard to do. Websites match people who want out of a car lease with people who are looking for a short-term lease, but these match-ups are typically hard to negotiate.
Lisa Nielsen is a marketing consultant for small businesses and start-ups. As part of her consultancy, she writes advertising copy, newsletters, speeches, website content and marketing collateral for small and medium-sized businesses. She has been writing for more than 20 years. She is also a business strategist, trainer and executive coach. Nielsen holds a Master of Business Administration from the University of Miami.