The trade-in price has been settled, the decision to buy made, the price resolved, and the extra options determined. Now you must decide how to finance. Should you buy or lease? The line between the two options is often blurred. The general rule is that leasing makes sense if you are short on a down payment and/or need low monthly payments.

PROS AND CONS OF LEASING

Though your down payment and monthly costs are usually lower when you lease a car, leasing also has a darker side:

• At the end of the contract, you don’t own the car.
• If you decide to turn in your car at the end of the lease, there are typically many fees to pay.
• The end cost for the vehicle may be unclear.
• Manufacturers and dealers love leasing because more people can afford the monthly payments, and at the conclusion of the lease, they are back in the market for another car. You should immediately be wary of anything the manufacturers or dealers favor, as it is typically not in the customer's favor.
• Leases customarily run for three years. At the end of that time, you will be forced to search for a new car.
• The implied ease of leasing is so tempting that many customers may not fight for a good purchase price, even though an outright purchase may be more beneficial in the long run.
• Leasing arrangements are so complex that more dealer profit can be hidden in the leasing structure.

If you decide to lease, be aware of your motivation. Don’t choose the leasing option for cheap monthly payments because you failed to get the price you wanted for the vehicle. Fight for a high trade-in, a favorable price on the new car and all other points outlined in the previous Chapters. Only then negotiate for the best leasing terms.

LEASING CONSIDERATIONS

• Initial Considerations:
• Do you want a closed or open lease? The car will have a fixed or a non-fixed value at the completion of the lease. In a closed lease, the vehicle's price is fixed at the end of the lease. Most leases are now closed-ended. The advantage of this type of lease is that there are no surprises when you turn your car in.
• Do you want to keep the car after the end of the lease?
• How large of a security deposit does the dealer require? Try to keep it to a minimum. A security deposit, which is usually refundable, protects the bank or leasing company from excessive wear and tear. A security deposit is typically one month’s deposit. Try not to let it go over this amount. Always stress that you should not have to pay this fee because you are a clean, cautious and conscientious person who takes great care of his vehicles..
• Determining Price:
• Price for the car. Did you negotiate for the most affordable price for the car? How close was this price to the dealer’s cost? (Remember, you should not pay over $300-$400 above dealer’s costs).
• Price for your trade in. How close was it to Blue Book wholesale? (Your goal is to earn within $200 of Blue Book wholesale for your trade in).
• Did you pay for an ADMU, AMU, dealer advertising or dealer preparation (cleaning and maintaining the vehicle)?
• Is there a factory-cash-back that can be used toward the car purchase? How much? While factory-to-consumer rebates are often advertised, factory-to-dealer incentives are not. Ask the dealer directly if he is enjoying any factory-to-dealer rebates. Demand an answer; don’t let him divert you by telling you that it is "none of your business." If he refuses to give a figure, estimate it at a level that is to his disadvantage. For example, if the factory hands him $1,000 for each car he sells, expect the price to be lower than what he quotes you. Insist that this information is critical to the sale. You can also easily find this information through Edmund’s advertisers or even on the Internet.
• What kind of options did you pay for? Did you take any options you did not want?
• How much do you need to finance? This is called your Acquisition Price. You can figure this cost by subtracting your trade-in price, rebates, and discounts on equipment packages from the most favorable car price. Make sure you write down the acquisition price.
• Interest Rates:
• What is the dealership’s interest rate for leases?
• How does this rate compare to a bank’s interest rate?
• How long do you want to lease?
• Points to Argue:
• What residual value will the dealership give you? (The residual value is the car’s value after the lease is over). Try negotiating this value upward. If it isn’t reasonable, ask the dealer to consider a different leasing institution to find a higher value. One way to see if the residual value is reasonable is to compare the depreciation percentages of previous years. Use the Blue Book for this. For instance, for a three-year lease see how much a similar car sold for in 1992 compared to its worth in 1995. Then see how much a similar car sold for in 1993 compared to its 1996 worth, and so on.
• If buying the performance model of a car, will you be hit with a lower residual value? Argue that performance cars usually sell for more than their usual value.
• Items to Negotiate:
• Discuss the lease-end purchase option, the price you would need to pay to purchase the vehicle at the end of the lease. Try to attain the same interest rate as the initial lease. Make the purchase optional.
• Negotiate any premature buyout option.
• Negotiate any involuntary buyout option.
• Determine what happens if the car is totaled?
• Discuss prepayment options.
• Find out how much gap insurance will be? If a car is stolen or destroyed, the insurance payment is usually less than the amount still owed on the vehicle. Gap insurance covers this “gap.”
• What about repairs and guarantees? Who does the repairs? Are they covered in the factory warranty? Who handles damage due to accidents or acts of nature?
• What sort of insurance requirements does the dealer demand?
• Things to Clarify:
• Discuss the condition of the car at lease end. Make sure you are not stuck buying new tires. Ask about any possible small dents, fabric rips, and equipment that doesn’t work (e.g. the power options). Get a firm written description of what is allowable and what is not.
• How many miles are allowed per year? What sort of penalties are assessed for overages on miles? Are there credits for mileage under the allowance?
• Try not to accept a large disposition fee. A disposition fee is a charge to take the vehicle back into the dealership at the end of the lease. There is no logic in this cost. It is merely a way to drain more money from you. When you opt to buy a new vehicle, all costs are up-front. When you lease, on the other hand, most fees materialize at the end, which is why leasing initially appears to be a cheaper option.
• Leasing Checklist:

Interest rate: ______________________________

Is it at APR or simple interest? ______________________________

Length of the lease: ______________________________

Interest rate for purchase of the

car at the end of the lease: ______________________________

Price guarantee of the car at the

end of the lease: ______________________________

Does the interest rate change

if you lease or buy? ______________________________

Does the price or financing

change if you lease or if you buy? ______________________________