You know your goal is to get a new car. Now it’s time to decide how you’re going to go about doing so. Some drivers decide to purchase the car altogether, while others discover it may be more prudent for them to lease, which is similar to buying a house versus renting an apartment.
Leasing can offer a shorter-term way to get behind the wheel of a brand new vehicle for a lower monthly payment than buying, although you’ll either have to return the vehicle at the end of the lease or buy out your contract if you want to keep that set of wheels.
Before you sign your name on the dotted line of that lease contract, make sure you understand all of the following considerations.
#1: Residual Value
Leasing involves paying for how much a vehicle depreciates only during the span of your contract — the difference between its MSRP and its residual value, or how much lenders estimate the vehicle will be worth at the end of the contract. The residual value is expressed as a percentage, i.e. a certain vehicle may have a 60 percent residual value.
Some vehicles tend to hold their residual value better than others. As you’re shopping for a car, keep in mind that a higher residual value will mean you’ll pay less in depreciation over the course of the lease.
#2: Money Factor
Interest rates are a part of leasing, and money factors are how lenders calculate how much you will pay in interest. Pro tip: Find the money factor (a decimal) and multiply it by 2,400 to arrive at your interest rate. The money factor you are offered will depend on your credit standing, along with other factors.
#3: Annual Mileage
Leases tend to cap mileage. If you surpass this limit, you’ll have to pay a fee per mile. As you can imagine, going over the yearly mileage cap can get very expensive very quickly.
Ask ahead of time about the annual mileage limit. If you think it will insufficient for your driving habits — like if you commute a long distance to and from work every single day or take lots of road trips — then try to get the mileage adjusted up front rather than paying the fee later.
#4: Lease Incentives
Certain times throughout the year tend to be most fruitful to lease, like if manufacturers are clearing out previous model years or have special promotions going on. If you have your heart set on a new SUV, keeping an eye on Jeep Grand Cherokee lease deals could help you save hundreds or thousands of dollars by acting at the right time — and so forth. Manufacturer and dealership websites are hubs for lease incentives, as well as auto industry websites that compile lists of current lease deals.
#5: Total Cost to Lease
It’s easy to be dazzled by a low monthly payment, but make sure to calculate the total cost of the lease start to finish by multiplying that monthly payment by the length of the lease.
#6: What Happens at the End of the Lease
When your lease is up, there are generally two choices: Return the vehicle or do a lease buyout. Your lease contract will display a buyout price — the amount you’ll have to pay to become the owner of the previously leased vehicle. This buyout price may be comprised of the residual value plus a fee, depending on the dealership. You might even be able to negotiate this buyout price to get a more favorable deal.
Leasing comes with lots of considerations, each one worth understanding so you can ensure you’re getting the best deal possible while avoiding hidden costs.