can offer a number of advantages, but on one condition: You have to understand the lease.
Trouble is, these contracts are often more complex than a bank loan. To ensure the lowest possible lease payments, you'll need to understand the fine print. Yet even with low interest rates on auto loans, it can be worth it, which is one reason why more and more people are turning to leasing. One benefit is that you pay only for the portion of the new vehicle that you use. For example, in leasing a car that costs $30,000 and that will be worth $18,000 after 36 months, you're only paying for the $12,000 difference, plus interest.
Here are some key ideas to consider before signing on the dotted line.
Cap cost -- that's the price of the car, and lower is good. In leasing a new car, always focus first on negotiating the lowest possible price. The "capitalized cost" (or cap cost) is the price at which the dealer will sell the car to the leasing company. The lower the price you can get from the dealer, the lower your monthly payments.
Cap-cost reduction -- that's the down payment, and lower is good. You can choose to make a down payment or apply a trade-in, customer rebate, or factory-to-dealer incentive toward the cap cost. This down payment reduces the cap cost and will lower your monthly payments. When leasing, it's typically best to put as little money down as possible. That's because big down payments can be risky, as you are simply pre-paying some of the lease's monthly payments. If the vehicle is stolen or totaled in an accident, your insurance company will pay off the remainder of your lease (assuming you have gap insurance), but you may lose your down payment.
Residual Value -- that's the price of the car when the lease ends, and higher is good. The "residual value" is the price the leasing company figures they can charge for the vehicle at the end of the lease. This will also determine your monthly payments because the difference between the cap cost and the residual value is the portion of the vehicle's value you are paying for during the lease. The higher the residual value, the lower the monthly payment. The best vehicles to lease are those with residual values of around 60 percent or more of their original price after 36 months. To find out the residual values of many vehicles, check out Automotive Lease Guide's so-called Black Book.
Money factor -- that's the interest rate, and lower is good. Another factor in negotiating a good deal on a lease relates to the "money factor" or "lease factor." That refers to the payment interest rate, which in leasing is expressed as a small decimal number. To calculate the equivalent annual interest rate, multiply the money factor by 2,400, regardless of the length of the lease. For example, a money factor of 0.00229 would equal 5.5 percent. Because the interest charge is rolled into the monthly payment, the lower the money factor, the lower your monthly lease payment.
Lease term -- that's the length of the leasing contract. This refers to the number of months you are expected to make lease payments. A longer lease will result in lower monthly payments. But be careful here: Always ensure the lease doesn't run longer than the vehicle warranty.