A guide to leasing a vehicle

By Rick Keffer, For the News-Leader

Much of what we see advertised these days by car manufacturers are their lease offers. To many it is misunderstood, both with negative and overly positive viewpoints.

So let's begin by realizing that a lease is a depreciation schedule at heart. In that your new vehicle is definitely a depreciating asset, it can make sense in some cases. The challenge is, a large majority of people is not comfortable with how it works and feel vulnerable to making a bad decision. And rightfully so.

The ideal lease prospect drives 20,000 miles a year or less, historically replaces their vehicle frequently and likes the fixed cost of cars that are generally under warranty.

There are five components, when understood, which allow for an informed lease. They are: 1) capitalized cost, 2) residual value, 3) cost of money/APR, 4) options at lease end, 5) related costs/fees.

The capitalized cost is selling price and should be understood just like on a purchase. Think of a lease as just a way to finance your car, which is all it is. Next, verify the residual, which is a percentage of the MSRP of the vehicle (the higher the residual, the better as it makes for a shorter depreciation schedule). Next, and frequently overlooked, verify the cost of money in APR terms. Fourth, make sure you understand your options at the end. On a closed-end lease, you can return the car within mileage and condition parameters, and walk away, which is the most common.

Find out if the option to purchase is at residual value (preferred) or existing market value. Last, you may or may not have to include a security deposit and bank acquisition fee in the mix - find out. Expect sales tax and tag and title fees just like on a purchase. The tax benefit of the lease is that you pay tax only on the payment, not the whole car.

If you can get your arms around these five items, a lease can be good. Too many people are drawn to the low payment and don't delve into the terms of the lease. Most ads you see are for 10,000 to 12,000 miles a year; 15,000 is usually the standard amount and costs more. You can buy excess mileage if you choose. Also, most ads include a lot of upfront cash that, when taken away, makes the payment shoot up.

Cash on a lease affects the payment much more than on a buy as the term is shorter. Try to get a term of no more than 36 months, which will generally keep you in warranty and provide a more fixed cost. Many ads feature 48- or 60-month terms and it is tough to pay for all that time and have to give it back. Also, be realistic on your annual mileage. Extra miles are cheaper up front to buy than the mileage penalty for going over.

A trade-in can be included and result in a downpayment (capitalized cost reduction on a lease form). What often happens to people upside down on their trade is they are put in a lease to roll over negative equity. Again, be careful you understand the effect. The upside is when the lease is over, you are back to even.

Finally, how to compare a lease agreement versus a buy. With all the same terms, figure your total of purchase payments. Next add the total of your lease payments and the residual value - that total needs to be equal or hopefully less than the purchase payment total.

Editor's note: This column was published originally in April. Rick Keffer owns and operates Rick Keffer Dodge Chrysler Jeep in Yulee. He invites questions or positive stories about automobile use and ownership.

rwkcar@aol.com