spanning about six years, car loans can seem like burdensome debt. A lease provides you with an opportunity to choose certain terms of your agreement—you drive the car as long as you need it, and at the end of the lease period, you wind up debt-free.
Lower monthly cost: Leases typically have lower monthly payments than auto loans. You could also save on vehicle maintenance—since most leases are short in length, there’s a good chance that any repairs your car needs will be covered under the manufacturer’s warranty.
No loss on depreciation: The car you’ve just agreed to finance starts losing its value the moment you drive it off the dealership’s lot. That can create a situation where by the time you finish paying off a loan, your car is worth very little. With a car lease, there’s no need to worry about the loss of depreciation. You pay to use the car while it’s still relatively new and you’re not responsible for trying to sell or trade it in afterward.
If you’re leasing for the first time, it’s important to thoroughly understand how the process works before you sign any paperwork. Here’s what you’ll need to pay attention to:
You’ll still have monthly lease payments: A car lease is similar to a car loan in the way that you’ll be expected to make an upfront payment followed by monthly payments for the duration of the lease term. The difference with a lease is you’re not paying off a loan to take ownership of the car. Instead, you’re paying for the value the vehicle loses as you drive it.
When the lease is up, you won’t own the vehicle: The general rule with auto leasing is that you
once the term is up—this is known as a closed-end lease. It’s also very common for the dealership to give you the option to purchase the vehicle for its residual value once the lease is up.
Lease terms are negotiable: Another reason why leases are known for their flexibility is the negotiation aspect. Most dealerships are willing to negotiate the terms of a lease (even when they’re running lease deals, incentives, and specials)—so it’s important to get to know all the terminology before you sign an agreement.
Terms to know
Capitalized cost: Also called the “cap cost”, this is the amount of money that your monthly lease payments will be based on. Often, this figure is the same as the MSRP or purchase price, but fees for service contracts, registration, warranties, and insurance will be added on. Negotiating a lower cap cost will lower your monthly payments.
Money factor: Like a car loan, you should expect to pay interest on your monthly
—this is known as the money factor or rent charge. Financial experts suggest that the money factor on a lease should fall around 0.0023, which translates to a rate of 5.5% or lower. A money factor higher than 5.5% may not be the best deal.
Mileage cap: Most lease agreements put a limit on how many miles you can drive every year. Pay attention to this number—exceeding the mileage cap will result in extra fees.
Red flags to watch out for
If you’ve decided you want to lease your next vehicle, don’t rush into signing a lease agreement or pass up a chance to negotiate the terms. Be sure that all the terms are put in writing before you sign, and be cautious of a car dealer or leasing company that:
Suggests you sign the lease on your first visit
Will only discuss monthly payments without negotiating the cap cost or money factor
Tacks a bunch of extra fees and expenses onto your cap cost
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Average monthly lease payment in Florida
Based on data from Experian, the average cost to lease a new car in 2020 was $467 a month. Financial advisors recommend keeping your total car expenses at or below 20% of your monthly income.
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