Home » Auto » Buying A Car » Leasing vs. Financing

Details to know

• Negotiating
• Conditions of a lease
• Terminating a lease
• Types of leases
• Useful definitions

Negotiating

Just as you would negotiate the financing of a car, almost everything in a lease is also negotiable including:

• Asking price
• Residual value
• Excess mileage charges
• Purchase option price

As a down payment, most leases require the first month's payment and a security deposit equal to one monthly payment. This security deposit may or may not be refundable. You should also be prepared for some upfront charges, like air conditioning and tire taxes.

Here are some helpful tips to keep in mind when negotiating the terms of your lease:

• Try to match the term of the lease with the length of time you plan to use the car - a two or three-year term is ideal.
• Aim to keep the lease term shorter than or equal to the length of the manufacturer's warranty. This will assist in limiting the amount you may be required to pay in maintenance expenses.
• Don't compare leases solely by the monthly payment. Since different leasing companies offer different deals, you should examine all the conditions and requirements - including the annual driving distance and limit, penalties for early termination and how 'normal wear and tear' is defined.

Conditions of a lease

Since you are not the owner of a leased vehicle, there are many conditions you must abide by. For example, you are not normally permitted to modify a leased vehicle. Any modifications contrary to the lease agreement will cost you.

You are also responsible for any damage to the vehicle in excess of 'normal wear and tear.' Be sure you are clear on the lessee's definition of 'normal wear and tear,' so you are not subject to inflated charges at the end of your lease.

Many leasing companies offer insurance plans to cover the difference between the replacement cost and what you owe on a lease, in case your vehicle is stolen or written off in a collision. You should check with your insurance company to see if they can offer you more competitive coverage.

Terminating a lease

With most leases, you are not allowed to purchase the vehicle or terminate the lease prior to the lease term's expiry.

If you choose to terminate a lease prematurely, you can expect to pay a hefty penalty. Some lease companies will charge anywhere from six months to a full year of lease payments as the penalty for early termination.

Types of leases

Close End Lease: The lessee is not responsible for the value of the vehicle when the lease term is expired. Also called a net-net, operating or walk away lease.

Open End Lease: The lessee is responsible for the value of the vehicle at the end of the lease term. Also called a finance or capital lease.

Useful definitions

Capitalized Cost: The total cost of a lease, including the price of the vehicle and any applicable fees, taxes and other costs upon which the term of the lease is calculated.

Capitalized Cost Reduction: Cash down payment made at the start of the lease term, in order to reduce the size of monthly payments over the term of the lease.

Gap Insurance: Many leases offer insurance plans to cover the difference between the replacement cost and what you owe on a lease, should the vehicle be stolen or written off in a collision. Also called a deficiency liability waiver or guaranteed asset protection.

Full Disclosure Lease: A lease whereby key pieces of information are available to the lessee.

Lease: An alternate method of financing a new vehicle. The buyer purchases the use of a vehicle for a specified period, rather than purchasing the vehicle itself.

Lease Rate: Term used for the finance rate the lease payments are based upon. Usually appears as a decimal (e.g., 0.006). To arrive at an annual percentage rate, multiply this figure by 2,400. For example: 0.006 x 2,400 = 14.4%.

Lease Term: The length of time for which the lease is in effect - usually two, three or four years. It will be stated in the lease agreement.