Some cars, trucks, and SUVs you see out on the road have been purchased by the driver, either outright in cash or through an auto loan. Other vehicles have been leased, meaning the driver is essentially “renting” them for the duration of a contract — often around three years.
If you’re interested in leasing your next vehicle, the next step is understanding what a car lease agreement entails — and which important factors to consider before signing so that you can know exactly what to expect.
Here are some tips for how to read a car lease agreement effectively.
How Is Leasing a Car Different Than Buying?
Leasing offers alternatives to buying in a few key areas. Here are some of the main differences:
- Lease contracts typically last 36 or 48 months, after which you will return to the car to the dealership or buy it for the amount stipulated in your contract.
- Leases often do not require as large of a down payment as auto loans do or may not even require a down payment at all.
- The monthly payments tend to be lower when leasing because you’re only paying for however much depreciation occurs during your contract rather than the entire value of the vehicle.
- Leasing limits the number of miles you can drive in a year whereas buying does not.
- Maintenance and repairs are usually completely covered under a lease, whereas warranties usually expire at some point during car ownership.
Understanding the basics of how leasing works — and how it’s different than buying a car, especially if you’re used to the purchasing process — will help make it easier to understand a car lease agreement when you do visit the dealership.
Important Auto Lease Terms to Know
The better you know the meaning of important auto lease terminology, the better your chances of finding and negotiating the best lease deals available to you.
According to Edmunds, here are the key figures that will factor into your decision:
- Sale price: Also known as market value, this is the cost of the vehicle upon which monthly payments are calculated.
- Residual value: This figure tells you what percentage of the vehicle’s value will be left at the end of your lease. If you decide to buy the car at the conclusion of your lease, this is the amount you’ll pay. A higher residual value means less depreciation, so finding a model with high residual value can be a savvy way to save.
- Mileage limit and charges: You need to know not only how many miles you’re allowed to drive annually, but how much per mile you’ll be charged if you exceed this limit. Each additional mile can cost 15 to 25 cents after the fact, so if you think you’ll need more miles it’s smarter to negotiate them up front if possible.
- Money factor: The money factor is what’s used to calculate the amount of interest you’ll owe, so lower is better. Specifically, you will multiply the money factor by 2,400 to determine the annual percentage rate (APR).
- Fees & taxes: Even on “no money down” vehicles, there will be costs required in the form of various fees and taxes. Some examples are the acquisition fee (which goes to the bank) and the disposition fee (which goes to the dealership at the end of the lease). Be sure to ask about each of these costs when you’re crunching the numbers.
Having a good grasp on the terminology of leasing a car will help you navigate the paperwork like a pro and negotiate whenever possible.