How To Lease A Car: Lease Term Types

When deciding how to lease a car, some of the terms and factors associated with car leases may be a little vague and confusing. Once you find the car you would like to lease, the terms of the lease are probably the most misunderstood parts of the lease. Remember that whenever you agree to terms, whether it be with a dealer or a bank, you should always understand every part of the lease. You should feel comfortable knowing that you walked out of their office knowing exactly how much you will be paying and for how long. Also understanding all the little terms about the lease will help you understand your contract. 

A few terms to watch out for and understand when leasing a car: residual value, open vs. closed lease, lease term length, mileage, fees and payments and depreciation. Let's look at each of these a bit closer. 

Residual Value

The residual value of the vehicle has a huge impact on the final price of the car when you lease it. It refers to the price of the vehicle that the owner expects to sell the vehicle at when it's at the end of its useful life. The higher the residual value, the lower the payments on your lease. However, if the residual value of the car is high, that's the price you'll be paying if you decide to purchase the car at the end of your lease. 

Open vs. Closed Lease

An open lease is mainly used for business (commercial) purposes. The lessee would pay for the price difference between the residual value and the resale value at the end of the lease. In a closed lease, the lessee will only pay for extra mileage and any damages done to the vehicle. Most lease types will be closed, providing you a better value.

Lease Term Length

Most leases are either 24, 36 or 48 months. Depending on the length of the lease, the prices per month will fluctuate. The shorter your lease, the lower the price. The longer your lease, the higher the price per month. This is because on shorter leases, there is less wear and tear on the vehicle. Make sure you ask about a bumper-to-bumper warranty and don't extend your lease out past this date.

Mileage

When you sign into a lease, you'll be subject to a limit on how much mileage you can put on the vehicle. Most standard leases are set at 12,000 miles per year, but it is worth it to purchase the extra mileage, especially if you think you will go over the standard mileage. If you use in excess of the mileage set forth in the lease, you'll have to pay extra when the lease expires.

Fees and Payments

When leasing a vehicle from a dealer, there are usually fees added on, such as an acquisition fee. You can sometimes negotiate these payments down lower than what they offer or even sometimes negotiate them completely out of the lease. Some dealers will also ask for a down payment. 

Depreciation

Because of the depreciation on the vehicle, you might be able to claim it as a deduction, so check with your tax advisor before you lease.

As always, make sure you understand the above terms and any other terms that might be present in your lease. Check out the terms of the lease before you sign the contract, which will help you feel more comfortable about it. If you ever have any questions, ask the dealer. Don't be afraid to seek an explanation.