What Is Leasing a New Car?

Leasing a new car refers to signing a contract with a car dealership that gives you the right to drive the car for a certain period of time in exchange for making rental payments to the dealership. Depending on your financial circumstance and automotive preferences, leasing a car might be a good deal. But, unless you know what you're looking for, you could end up stuck with a fee-filled lease.

Lease Terms

The basic terms of a lease tell you how much to pay each month and how long you can lease the car. However, there's often additional terms buried in the contract. For example, a lease might limit how many miles you can drive the car and charge you an additional fee if you go over the limit. Other charges to look out for include disposition fees, which you must pay when you turn in the car without leasing another one from the same dealership, or a purchase fee, which you pay on top of the purchase price if you decide to buy the car at the end of the lease.

Benefits of Leasing

Leasing a new car usually allows you to drive off the lot in a more expensive car than you would if you were buying one. When you buy a car, you pay for its entire value upfront. But, according to US News, with a lease, you're only taking on the cost of the difference between the car's value new and the car's value after the term of the lease, so your monthly payments are less. Finally, when the lease is over, you give the car back to the dealer -- you don't have to worry about finding somebody to buy it.

Drawbacks to Leasing

With a lease, you don't build any equity in the car like you would if you were paying down a car loan on a vehicle that you owned. So, there's never a point where you are done making payments and get to keep the car. When the term is up, you turn the vehicle back in and start over from scratch with a new car. In addition, because you don't own the car, you're limited in the modifications you can make to it. And, when you return the car to the dealer, you have to pay for any damage even if it's minor. For example, a car might work just fine despite a small scratch on the door. But, you have to get such damages repaired or pay the dealer.

Negotiate Your Lease

If you're going to lease a car, negotiating with the dealer can save you a substantial sum over the term of the lease. While the lease price is the easiest term to recognize, don't forget the other terms such as mileage limits, purchase price and other fees that get tacked on. Knowing that the "capitalized cost" is what the dealer could sell the car for and that the "residual value" is the value of the car after the lease will help you speak the dealer's language.

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