A. Yes, please keep these three money-saving tips in mind when leasing a car:
1. Make Sure You Have Gap Insurance
This is perhaps the single most important — and most overlooked — element of leasing.
Say your contract says the car’s residual value at the end of the lease will be $15,200, but the car’s actual value will be only $10,000. If you wreck the car three months before your lease expires, guess how much your insurance company will pay in settlement?
The insurer will pay the dealer (who owns the car) the actual market value, which is $10,000. But your contract says the residual value is $15,200. That means you are responsible for the other $5,200.
This “gap” between the lease contract’s stated residual value and the car’s actual value has caused many lessees to incur huge losses due to accidents.
The solution: Make sure your lease contract includes “gap insurance” — even if you have to pay extra for it, for being without it is like driving without insurance.
2. Avoid the Cap Cost Reduction
When someone buys a car, the more money he puts down, the less his monthly payments. Similarly, to lower your lease payments, you can make a cap cost reduction, which is a large, one-time payment made at the start of the lease. And as with a down payment, the more you pay in cap (short for capitalized) cost reductions, the lower your monthly payments. However, this is where the similarity ends.
Remember that when leasing, you do not own the car. Thus, if you make a cap cost reduction, you are making a down payment on property that is not yours. Never do that — no matter how much the dealer wants you to, and no matter how much it reduces your monthly payments — for in the long run, you are throwing your money away.
And the run might not be so long, either: Steve leased a $25,000 car and paid $3,000 in cap costs. Two months later, he totaled the car. Since he didn’t own the car, his insurer repaid the dealer $22,000; Steve lost his $3,000.
Paying cap costs is a waste even if you don’t wreck the car. Why? Because the only reason dealers want you to pay it is so they can offer you a monthly payment that sounds really low.
Would you visit a dealer who advertised a $20,000 car for just $199 a month? You bet! But would you get excited about having to pay $263 per month for the same car? Not likely. And that’s why dealers want you to pay a cap cost reduction.
You see, in one recent ad, a car dealer offered a $20,000 car for $199 per month for 24 months with a cap cost reduction of $1,525. But paying $199 per month with $1,525 down is the same as paying $263 per month with no cap cost reduction. If $263 doesn’t sound so hot (and it’s not), then the other deal isn’t so hot, either.
Instead of paying a cap cost reduction to lower your payments, ask the dealer to let you make additional security deposits. This will have the same effect as a cap cost reduction, except you’ll get the deposit back when you return the car.
3. Never Buy Optional Equipment in a Car You’re Not Buying
When leasing, you must keep in mind that you don’t own the car. That means you must be careful when agreeing to options that the dealer offers you. Take Carmen for example. She worked out a fine deal on a car — $250 per month for 36 months, with no cap cost reduction.
But then she decided to have the dealer install mats, fancier rims, a iPod adapter, and a navigation system. The cost of all these items came to $1,800, so the dealer added $50 to the monthly payment.
This not only made sense to Carmen, since $50 per month for 36 months is $1,800, she thought it was a heck of a deal — because although she would be paying for the options over three years, the dealer did not add in any interest.
It was a deal all right — but for the dealer, not Carmen. When the lease expired three years later, Carmen returned the car — and with it, the mats, rims, iPod adapter, and navigation system. Carmen paid the full cost of owning those items, but she only rented them. Dumb move, Carmen.
What she should have done is incorporated the cost of the options into the overall price of the car, and then negotiated the lease price. That way, she’d be renting the options along with the rest of the car.
Remember: When you lease, you are renting the car and everything in it. Don’t pay the costs of ownership when you lease.
4. Never Lease Beyond the Car's Warranty
If you choose to lease, don’t lease for a term beyond the car’s warranty. If the car comes with a two-year bumper-to-bumper warranty, for example, get a two-year lease. By opting for a three-year lease, you could be stuck with huge repair bills in year three — on a car you don’t own!