5 Myths About Leasing a Car

Automotive leasingThe Basics

5 myths about leasing a car

Don’t believe everything you’ve heard. For many drivers, leasing can be a better deal than buying. Here’s what you need to know before you head into a showroom.

 

Leasing often gets a bad rap, and no wonder: Its confusing argot sounds like fodder for a course in high finance, and dealers have been known to slip bad deals past confused car shoppers who simply wanted low monthly payments.

 

About 20% of new-car transactions are leases, but more people should be leasing. As interest rates rose, automakers shifted incentives from rebates and low-interest financing to leases. If you know what you’re looking for and negotiate smartly — and get over the five myths below — leasing can be a good deal.

 

1. Buying is cheaper than leasing.

If you keep a car well past the day the loan is paid off — or you paid cash to begin with — you save money by buying. But if you trade in your car before the loan is paid off, the value of the trade-in is unlikely to cover the remaining balance on the loan.

For example, if you leased a new Chevrolet Malibu LTZ for three years, your monthly payments could be $489. When you turned in the car at the end of the lease, you’d pay a “turn-in” fee of $395 and then walk away. If, however, you bought the Malibu with a five-year loan your monthly payments could be $546, and after five years you’d own the car free and clear.

But say you want another car after three years. To match the residual value written into a three-year lease, you’d probably have to sell the Malibu on your own rather than trade it in. Then you’d have to pay off the loan. Buying would leave you about $1,600 poorer.

Leases are negotiable. But first you need a tour of the jargon:

 

2. Capitalized cost. The vehicle price is called the capitalized cost. You should haggle over this just as hard as you would haggle over the price if you were buying.

Money factor. Another crucial term is the money factor. The lower this number, the better (multiply it by 2,400 to get an estimate of the interest rate). Dealers are sometimes reluctant to reveal the money factor, so be persistent.

Residual value. Finally, the residual value is the value of the car or truck at the end of the lease.

An inflated residual value lowers your monthly payments, but it can also handcuff you.

A more realistic residual value will make it easier to sell the lease, trade your vehicle midlease or buy the vehicle at the end of the lease. Compare quotes from auto insurers

Ask the dealer to show you deals from several banks, focusing on the money factor and the residual value.

 

3. Only businesses get a tax break on leases.

Tax laws allow businesses to deduct monthly car-lease payments as expenses.

But most individuals get tax breaks, too. In most states, you pay sales tax only on the monthly payments, not the sale price of the vehicle. In the Malibu example above, you’d owe taxes on about $18,000 in payments rather than the $27,000 sale price.

Arkansas, Maryland, Minnesota, Texas and Virginia charge sales tax on the entire sale price.

If you’re in the market for a car, one of your first decisions will be whether to buy or lease. Which is the better option?

 

4. You may have to pay hefty fees when you turn in the car.

The typical annual allotment of 10,000 to 12,000 miles is stingy, and the 35 to 55 cent-a-mile penalty for exceeding the limit seems daunting. But if you buy a car, you’re also penalized for higher-than-average mileage when you trade it in.

You can probably negotiate a higher limit in exchange for a higher monthly payment and still save money.

 

5. If you want out early, you’re stuck.

Several fee-based Web sites, including LeaseTrader.com and Swapalease, match people who want to get out of a lease early with those who want to assume a short-term lease. At LeaseTrader.com, for example, it can cost $80 to post a vehicle and $150 to complete the transfer of the lease.