If you’ve never leased a vehicle before, the world of leasing may seem confusing. Leasing is a bit like renting a car long term, except that when the lease is up, you have a couple of options besides just returning the car to the dealership where you leased it.
Leasing a company car is a great option for cash-strapped businesses that don’t have the money upfront to buy a vehicle. Leases are typically calculated on the amount by which the vehicle’s value is expected to decrease during the lease period, so down payments and monthly lease payments are lower than you would pay if you bought a company car. A car that holds its resale value better will cost less to lease, as it loses less value over the lease term.
Be sure to compare any lease you’re offered with others on the market before you sign a contract. Typically, a lease commits you to making payments on the car for three years, but other terms may be available.
The following are other key factors to look at in a lease agreement:
- Capitalized cost: This is the lease price. You want to negotiate down the “cap cost” so it’s significantly less than the manufacturer’s retail price for the vehicle.
- Cap cost reductions: Be on the lookout for anything that might reduce your cap cost, such as factory rebates, dealer incentives, or the value of any trade-in vehicle you’re offering the dealer.
- The money factor: This is lease-speak for the interest rate. The money factor will be stated as a decimal, which you multiply by 2,400 to get the interest rate. So a money factor of .00032 means an annual interest rate of 7.68 percent. The money factor may be influenced by a range of variables, including your lease length and your credit rating. Often the best money factors can be found in manufacturer-supported lease programs.
- Residual value: This is the car’s value at the end of the lease. Unlike in car buying, where you won’t know the car’s worth three years from now until that day dawns, in leasing you agree upon a preset figure for what the car’s value will be when the lease ends. You want a residual value set as low as possible because if the actual resale value at the end of the lease turns out to be more, you could buy the vehicle at the preset residual price and resell it for a profit or apply that equity to another lease or vehicle purchase. This is known as having positive equity at the end of the lease. If your vehicle turns out to be worth less on the open market than the residual value set in your lease, you’re better off simply turning the car in and walking away.
Most dealerships offer lease agreements; but don’t limit yourself to the dealer’s offer. You can also lease a vehicle through an independent leasing broker. You can find an independent lease broker through the National Vehicle Leasing Association Web site.
If you must exit your lease early, you may pay penalties. It may be better to take out a loan, pay off the lease, and then resell the vehicle. One other option is to trade your lease for another lease. Sites such as LeaseTrader.com lease trades.
Business reporter Carol Tice contributes to several national and regional business publications.