Advertisement
Buying & Leasing a Car

Five Myths About Leasing a Car

Learning the facts could save you a bundle.

Leasing often gets a bad rap. And no wonder: Its confusing terms sound like fodder for a course in high finance, and dealers have been known to slip bad deals past confused car buyers who simply wanted low monthly payments.

Take Our Quiz: Should You Buy or Lease Your Next Car?

About 30% of new-car transactions are leases, but I'm convinced that more people should be leasing. As manufacturers figured out that the cash rebates they offered were hurting resale values, and as the credit spigot began to flow freely again, carmakers shifted incentives from rebates to low-interest financing and leases. If you know what you're looking for and negotiate smartly, you can save money by leasing and disprove the five myths below.

Advertisement - Article continues below

1. Leasing is a bad deal. In general, if you keep a car well past the day the loan is paid off (or if you pay cash to begin with), you'll save money by buying. But if you trade in your car before the loan is paid off, the value of the trade-in is unlikely to cover the remaining balance on the loan. And if you shop -- and negotiate -- as hard for a lease deal as you would for a purchase, you can come out ahead by leasing.

Advertisement
Advertisement - Article continues below

Say you negotiate to buy a 2013 Nissan Altima 2.5 S (sticker price: $23,365) for invoice price -- $21,403 -- with 10% down and a five-year loan at 2.9%. But after three years you decide you want a new car. If you trade in the Altima, you will likely get about 46% of the sticker price, or $10,621 (the resale value after three years, according to the Kelley Blue Book). Then you'll have to pay off the loan. Figure your total out-of-pocket cost will be $9,525.

Advertisement - Article continues below

But if you lease that new Altima for three years, your monthly payments will be $179 with a $1,820 down payment (Nissan has been offering subsidized leases on the 2013 Altima). When you turn in the car at the end of the lease, you'll just walk away (unless you go over your mileage allotment or have unusual wear and tear). Total out-of-pocket cost: $8,264. In this case, leasing would leave you $1,261 richer.

In most states, you pay taxes only on the actual lease payments, so leasing can put you even further ahead (see number 3 below). Plus, you typically don't have to bring cash to the table for a lease.

2. It's nearly impossible to negotiate a good lease. Almost every facet of a lease is negotiable. But first you need to understand the jargon:

Capitalized cost. In the leasing universe, this is the vehicle price. You should haggle over this figure just as hard as you would haggle over the price if you were buying.

Advertisement - Article continues below
Advertisement
Advertisement - Article continues below

Money factor. The lower this number, the better (you have to multiply it by 2,400 to get an estimate of the interest rate). Dealers are sometimes reluctant to reveal the money factor, so be persistent.

Residual value. This is the value of the car or truck at the end of the lease.

An inflated residual value lowers your monthly payments, but it can also handcuff you. A more realistic residual value will make it easier to sell the lease, trade your vehicle in the middle of the lease or buy the vehicle at the end of the lease, says Tarry Shebesta, president of LeaseCompare.com.

Shop for your lease at the dealer, banks and credit unions, focusing on the money factor and the residual value. (No matter who writes your lease, you’ll have to haggle with the dealer over the capitalized cost.) You can also go to LeaseCompare.com to comparison shop and apply for a lease. Or check out LeaseWise. For $350, the service will shop at least five dealers in your area.

Advertisement - Article continues below

3. Only businesses get a tax break. Tax laws allow businesses to deduct monthly leasing payments as an expense.

But individuals get a tax break, too. In most states, you pay sales tax only on the monthly payments, not the vehicle price. In the Altima example above, you'd owe taxes on about $8,264 in payments rather than the $21,403 vehicle price. (Arkansas, Illinois, Maryland, Oklahoma, Texas and Virginia charge sales tax on the entire price.)

4. You will have to pay hefty fees when you turn in the car. The typical annual allotment of 10,000 to 15,000 miles is stingy, and the 20- to 25-cents-per-mile penalty for exceeding the limit seems daunting. But if you buy a car, you're also penalized for higher-than-average mileage when you trade it in.

You may be able to negotiate a higher mileage limit in exchange for a higher monthly payment and still save money.

5. If you want out early, you're stuck. Several fee-based Web sites, including LeaseTrader.com and Swapalease, match people who want to get out of a lease early with those who want to assume a short-term lease. At LeaseTrader.com, you pay a fee of $90 to post your vehicle and $250 to complete the transfer of the lease.

Advertisement
Advertisement

Most Popular

11 Dividend-Paying Stocks You Should Think Twice About
dividend stocks

11 Dividend-Paying Stocks You Should Think Twice About

Dividend-paying stocks often can be a store of safety, but 2020 has been difficult on income equities. These 11 picks look like shaky plays despite th…
September 21, 2020
Medicare Basics: 11 Things You Need to Know
Medicare

Medicare Basics: 11 Things You Need to Know

There's Medicare Part A, Part B, Part D, medigap plans, Medicare Advantage plans and so on. We sort out the confusion about signing up for Medicare --…
September 16, 2020
Where You Should Invest Now
investing

Where You Should Invest Now

Kiplinger.com senior investing editor Kyle Woodley joins our Your Money's Worth podcast to answer investor questions about tech stocks, the election a…
September 22, 2020

Recommended

How to Save on a Used Car
cars

How to Save on a Used Car

Kiplinger's resident car guru David Muhlbaum joins host Ryan Ermey on our Your Money's Worth podcast to offer tips on buying a used car. Also, the pai…
September 8, 2020
The Right Fit Car for Older Drivers
Buying & Leasing a Car

The Right Fit Car for Older Drivers

Anticipate how changes in lifestyle and health might affect the kind of vehicle you will need over time.
August 26, 2020
Get Your Car on the Cheap
Buying & Leasing a Car

Get Your Car on the Cheap

Want to spend less on transportation? Step 1 is a car that’s used, but not used up.
July 22, 2020
The Risk You Face If You Receive Equity Compensation
options

The Risk You Face If You Receive Equity Compensation

Anyone who receives non-cash pay like stock options or restricted stock needs to understand, and heed, a major danger to their investment portfolio an…
June 29, 2020