It's a Good Time to Lease

published 7 October 2010

Leasing isn't for everyone, but many more people should probably do it. Typically, fewer than 20% of new-car transactions are leases. And not only did the weak economy scare away buyers, it also shrank the number of leasers by half. If you always have a car payment because you trade in frequently, you may find that leasing makes sense.

1. Lease deals abound. Increased demand for used cars this year has led to a decreased supply of them -- and higher prices. Manufacturers translate strong pricing in the used-car market into higher long-term residual values -- what their new vehicles are likely to be worth down the road. Stable or rising residual values mean leasing companies are less likely to lose money when leasers turn in their vehicles. Thus, automakers are eager to push leasing deals now, says Tarry Shebesta, president of LeaseCompare.com. Even nonluxury brands, such as Honda and VW, are promoting leases. You can lease a 2010 Honda Fit for $0 down and just $210 a month.

2. You could get more car for your money. Your monthly payments are less because you're paying only for the term of the lease. That's the main reason up to half of luxury-vehicle transactions are leases. For example, BMW is offering a 36-month lease on a 2011 335i sedan for $519 a month, with no money down. To purchase the same car with a 0.9%, five-year loan that BMW is offering now and $4,550 down, the payment would be $698.

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True, if you pay cash or keep the car well beyond the time the loan is paid off, you usually come out ahead by buying. But if you still have a car payment when you trade in, you'll be hard-pressed to get enough on the trade-in to pay off the loan. When you lease, you pay only the difference between the purchase price and the residual value written into the contract. If the car turns out to be worth less, the leasing company takes the hit, not you.

3. You can negotiate. Leasing has its own lingo, and it's tougher to negotiate when you need a translator. Start with the capitalized cost -- the price of the car -- and haggle just as hard as if you were buying it. Then look at the money factor, which is the interest rate (multiply it by 2,400 to get an estimate of the annual percentage rate); lower is always better. If there's no chance you'll buy the car after your lease term is up, a higher residual value is better because it will lower your payments. Just as when you're buying a car, make the dealer compete for your business. Besides shopping other dealers, check LeaseCompare.com for deals.

4. End-of-lease fees aren't so bad. If you maintain your car well, you shouldn't have to worry. Regardless, before the leasing company inspects the vehicle -- about a month before the lease ends -- get the vehicle detailed. It'll cost $100 or so but can buff out surface scratches and make the car look well cared for. If you have a ding or a dent, fix it. Otherwise you may be socked with excess wear-and-tear charges, which average $500 to $800.

Annual mileage allotments typically range from 10,000 to 12,000 miles, and overages will cost you 18 to 25 cents per mile. If you know you'll exceed the allotment, buy more miles at a lower cost upfront. You can buy extra miles at any time, notes John Sternal, of LeaseTrader.com, but the price goes up the closer you get to the end of your lease.

5. You can get out early. Thanks to lease-swapping sites such as LeaseTrader.com and Swapalease.com, which match people who want to get out of a lease early with those who want to assume a short-term lease, you can exit a lease before it's up. But it will cost you. At LeaseTrader.com, you pay a fee of $89 to post your vehicle's information and a $149 transfer fee. The leasing company may also charge a transfer fee. For example, Nissan charges $75; Mercedes charges $595.

Anderson has been with Kiplinger since January 2004, when she joined the staff as a reporter. Since then, she's covered the gamut of personal finance issues—from mortgages and credit to spending wisely—and she heads up Kiplinger's annual automotive rankings. She holds a BA in journalism and mass communication from the University of North Carolina at Chapel Hill. She was the 2012 president of the Washington Automotive Press Association and serves on its board of directors. In 2014, she was selected for the North American Car and Truck Of the Year jury. The awards, presented at the Detroit Auto Show, have come to be regarded as the most prestigious of their kind in the U.S. because they involve no commercial tie-ins. The jury is composed of nationally recognized journalists from across the U.S. and Canada, who are selected on the basis of audience reach, experience, expertise, product knowledge, and reputation in the automotive community.