Leasing a car is a way of financing the car, comparable to taking a loan. It is nothing like leasing an apartment or renting a car. When a car is leased, the dealership is actually selling the car to a leasing company, which in turn leases it to the customer with agreed-upon terms for monthly payments, term of the lease and interest rate.
Open-end leases are typically used for commercial leasing. At the end of the lease, the leasing company computes the car’s market value and compares that to the residual value of the car as determined at time of leasing. The lessee then pays the difference, which can be a significant amount of money if the car has been driven more miles than originally expected or if the market value of the car has dropped.
Closed-end leases are typically the kind that consumers use. At the end of the lease term, you can return the car and walk away. There are, however, some charges that you could be responsible for at the end of the lease, such as the cost of excess mileage or unusual wear and tear. You also have the option of purchasing the car at the end of the lease. The end-of-lease value of the car was pre-determined at the time you signed for the lease, and you can pay that amount to take possession of the car. It is not uncommon for lessees to buy the vehicle if its residual value is lower than the current market value.
Money Due at Signing
At the time you sign for the lease, you will have to make a payment based upon the terms of the lease. Leases require monthly payment at the beginning of each month, so the first month’s payment will be due at signing. A security deposit might be required, typically the same amount as the monthly payment. At the end of the lease, the deposit will be returned to you, less charges for excess mileage or damage. The terms of the lease might require a down payment, in which case you might also be responsible for sales tax. Some states, such as New York, Texas and Illinois, require that the entire sales tax be paid up front. This amount is usually financed along with the car.
The leasing company charges an acquisition fee for processing your loan, typically in the $500 to $600 range depending upon the value of the vehicle. At the end of the lease, if you do not buy the car, the leasing company may charge a disposition fee to cover the cost of selling or disposing of the car. The fee, which can run between $250 and $450, is something you might be able to negotiate. Finally there will be registration, tag, license and title fees, similar to what you would pay if you purchased a vehicle outright. The dealer may try to charge a documentation fee and even have it printed on their leasing form. This fee can be negotiated, often to the point of eliminating it.
Calculating the Lease Payment
Lease payments are based upon anticipated depreciation of the value of the car over the term of the lease. You will need certain numbers to calculate the payment: the selling price of the car, the residual value of the car and the money factor, all of which should be available from the dealer. If the dealer will not give you the money factor, take the loan’s annual percentage rate and divide by 2,400. Calculate the monthly depreciation by subtracting the residual value from the selling price of the car and divide by the number of months in the lease. To calculate the finance charge, add the purchase price of the car to the residual value and multiply this sum by the money factor, giving the monthly finance charge. To calculate the monthly payment before taxes and fees, add the monthly depreciation to the monthly finance charge.
- LeaseGuide.com: Auto Leasing Introduction
- LeaseGuide.com: Two Types of Leases
- LeaseGuide.com: Lease Fees and Taxes
- Consumer Financial Protection Bureau. "What Should I Know About the Differences Between Leasing and Buying a Vehicle?" Accessed April 12, 2020.
- Merriam-Webster. "Lease." Accessed April 12, 2020.
- AARP. "To Buy or Not To Buy." Accessed April 12, 2020.
- Consumer Financial Protection Bureau. "What is a Manufacturer Suggested Retail Price (MSRP)?" Accessed April 12, 2020.
- LeaseGuide.com. "Capitalized Cost – Cap Cost." Accessed April 12, 2020.
- Autotrader. "Leasing a Car: Can You Negotiate the Price?" Accessed April 12, 2020.
- Edmunds. "The 'Residual Value' of Leasing." Accessed April 12, 2020.
- Federal Reserve. "Keys to Vehicle Leasing: Future Value." Accessed April 12, 2020.
- LeaseGuide.com. "Money Factor—Explained." Accessed April 12, 2020.
- Federal Trade Commission. "Financing or Leasing a Car." April 12, 2020.
- Federal Reserve. "Keys to Vehicle Leasing: End-of-Lease Costs: Closed-End Leases." Accessed April 12, 2020.
Diane Stevens' professional experience started in 1970 with a computer programming position. Beginning in 1985, running her own business gave her extensive experience in personal and business finance. Her writing appears on Orbitz's Travel Blog and other websites. Stevens holds a Bachelor of Science in physics from the State University of New York at Albany.