Car leasing: 7 Questions to ask before signing
For some people, leasing a car is a way to stay in a fresh set of wheels with less commitment than ownership. That said, car leasing is still a commitment — one that’s worth taking seriously. Asking the right questions up front could save you some regrets down the road and maybe even save you some money in the process. Here are a few questions to ask when leasing a car that’ll help you ensure you’re getting a good deal:
- What is the upfront, drive-off cost?
- Are there any leasing specials or incentives available?
- What is the residual value of the leased car?
- What is the mileage limit?
- What other fees are there?
- How long is the lease?
- What happens at the end of the lease?
1. What is the upfront, drive-off cost?
Possibly the most important question of all when you lease a car is “What will all this cost at the end of the day?”
Your upfront, out-of-pocket cost — sometimes called the drive-off cost — or amount due at signing is usually a combination of your down payment (technically known as a “capitalized cost reduction”), first lease payment, plus various fees and taxes. Just like with a traditional car loan, a lower monthly payment on a lease is usually the result of a large down payment.
In contrast to car loans, however, a larger down payment on a lease may not always save you money in the same way it might for a purchase. While a larger down payment will certainly lower your monthly payments, it doesn’t have the added advantage of potentially improving your finance charge (or “money factor,” in leasing terms) as this is typically not disclosed to the customer. In addition, if the car is ever stolen or in an accident and deemed a total loss, there’s no guarantee you’ll recoup the down payment.
2. Are there any leasing specials or incentives available?
When you lease a car, dealers may offer specials, rebates and incentives which might present some attractive savings. Deals are usually prominently advertised, but you can also inquire about them directly. When considering such an offer, be sure to read all terms and conditions.
3. What is the residual value of the leased car?
With a lease, the lessor estimates the expected value of the vehicle at the end of the lease which is generally referred to as the car’s residual value. The residual value will be used to calculate your monthly lease payments, and it is also generally the amount it would cost to purchase the vehicle if you have that option at lease end.
4. What is the mileage limit?
Many leasing agreements come with a limit on the number of miles you’re allowed to drive per year. According to the U.S. Department of Transportation’s Federal Highway Administration, Americans average just under 13,500 miles driven annually. When leasing a car, it’s important to know your driving habits in order to select the mileage limit that aligns with your driving needs. Otherwise, you could end up owing extra money when you turn the car in at lease end.
On the other hand, if you tend to drive less than the national average, a low-mileage lease may be an option and present you with an opportunity to save a little money.
5. What other fees are there?
Contract details often include various fees built into your lease. Some of these, like the acquisition fees that help cover dealers' administrative costs, tend to be non-negotiable. However, when it comes to reducing fees, the words “nothing ventured, nothing gained” hold true. There are other fees (such as the security deposit) that you may be able to get waived or lowered if you inquire about them. Sometimes, it helps to just ask!
6. How long is the lease?
The length of your car lease can play a big role in determining your monthly payments. In a traditional installment sale, a longer term can reduce the amount of your monthly payment because the purchase price is spread over a greater period of time. In contrast, with a lease, you’re paying for the anticipated depreciation of the vehicle that occurs over the duration of the lease (plus the lessor’s rent charge). The longer the lease, the more anticipated depreciation there will be, so you may end up spending more money overall.
The art of finding a good car leasing deal is hitting that sweet spot between the monthly payment size and the total lifetime cost of the lease. Finding that balance is unique to each individual based on their finances and personal preferences. Understanding how the length of your lease term affects these costs can help you get there.
7. What happens at the end of the lease?
It’s important to understand your leasing options upfront so you can select a contract that provides your desired end-of-lease scenario. While there are a few options in the marketplace, the most common is a closed-end lease. This type of lease, sometimes called a walkway lease, has a set term (and typically set mileage). When it’s over, the lessee is not responsible for the difference between the vehicle’s residual value and its actual value. You may have to pay additional charges for excessive wear and tear, or damages directly caused by you, but you aren’t financially responsible for the additional depreciation beyond the residual value. This is in contrast to the less common open-ended lease where the lessee would be on the hook for this additional cost.
You may also have the option to buy the vehicle during or at the end of your lease or return the vehicle. In some cases, you may even qualify for a lease extension at the end of your term. As for returning the actual car itself, you aren’t always limited to the exact location you got the car from initially. Provided you get your lease from an authorized dealer, you can likely return the car to any other dealer authorized by your car’s manufacturer. That said, some dealerships may be hesitant to take on an unexpected piece of inventory, so it may still be helpful to inquire about the return with the originating dealership up front. This helps to ensure the return process goes smoothly when it’s time.
Car leasing can be a way to get a new car regularly without the commitment of ownership. As you shop around, asking smart questions like these and understanding why they matter can help you get a clearer picture of your leasing options.