Here are three items to keep in mind before you decide to lease your next car:
1. CONSIDER GAP INSURANCE.
This is an important – yet often overlooked – element of leasing.
Gap insurance covers the difference – or the gap – between the depreciated value of the car and what you still owe. Your contract might say 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, 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.
To help avoid incurring losses due to accidents, confirm if your lease contract includes gap insurance – even if you must pay extra for it. Being without it is like driving without insurance.
2. AVOID THE CAP COST REDUCTION.
When someone buys a car, the more money they put down, the lower their monthly payments typically are. Similarly, to lower your lease payments, you can make a cap (short for capitalized) cost reduction, which is a large, one-time payment made at the start of the lease. As with a down payment, the more you pay in cap cost reductions, the lower your monthly payments. However, this is where the similarity ends.
Remember that when leasing a car vs buying, you do not own the vehicle. Thus, if you make a cap cost reduction, you are making a down payment on property that you don’t own. That’s why we often advise our clients not to pay the cap cost reduction – no matter how much the dealer encourages it, and no matter how much it reduces your monthly payments.
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. FOREGO THE OPTIONAL EQUIPMENT IN A CAR YOU’RE NOT BUYING.
It may be enticing for the dealer to offer all the extra bells and whistles on your new car, but remember, you’re just borrowing it. Use your best judgement to determine if these are necessities or if you can forego the optional equipment.
Let’s take a new example where you’ve negotiated to lease your next car for $250 per month for 36 months, with no cap cost reduction.
But then you decide to have the dealer install mats, fancier rims, an iPhone adapter and the latest navigation system. The cost of all these items came to $1,800, so the dealer added $50 to the monthly payment.
On the surface you might think this is a great deal because you are paying for the options over three years and the dealer did not add in any interest.
But when the lease expires three years later and you return the car, the mats, rims, iPhone adapter and navigation system go with it. That means you paid the full cost of owning those items, but only rented them for three years.
A better strategy would be to incorporate the cost of the options into the overall price of the car and then negotiate the lease price based on the new total. That way, you’re only paying for the options during the term of your lease.
When leasing a car, keep in mind that you are renting the car and everything in it. Don’t pay the costs of ownership when you lease.