When Leasing a Car, Avoid the Lemons

Interest rates are on the rise, and as a result many consumers choose to lease rather than buy cars to avoid costly loans. If that sounds like you, you've probably learned that leasing can be a complicated, confusing experience.

Automotive Web site Edmunds.com says the average interest rate for new car loans was 8 percent in March, up from 6.4 percent a year ago. Edmunds says last month more than 19 percent of new cars were leased rather than purchased -- the highest rate in five years.

Here's the thing about leasing -- it's like having to learn a foreign language to get a new car! The process is baffling. Leases often require a smaller down payment and easier monthly installments than buying. But that's not enough reason to lease. If you know you're the type who likes to change vehicles every few years, and you don't mind having a car payment at all times, then leasing could suit you. If you prefer to keep driving your car for a number of years after it's paid off, you should buy.

You probably see the ads on TV all the time: "Lease the sleek new sporty speedster for just $299 a month for 36 months!" A lot of people go for these deals, then get the car home and realize they have no idea how much they actually agreed to pay for the car. Car dealers often emphasize the monthly payment instead of the total cost because it sounds more manageable to buyers. But some leases are so bad that if they were purchases it would be like paying 30 percent interest on your car loan, then not getting to keep the car once you've paid it off.

If you learn nothing else about car leases, learn this: Before you lease, you should negotiate a price for the car the same way you would if you were buying it. (Don't even tell the dealer whether you plan to buy or lease.) That way, monthly lease payment is then based on the negotiated price. It shouldn't be some random number the dealer dreams up.

If you hate haggling, this may not be welcome news. But think of it this way: You could end up paying less than the $299-a-month advertised on TV. Monthly lease payments are calculated lots of different ways, but here's a simplified formula: You take the car's purchase price, minus what it will be worth at the end of the lease and divide by the number of months.

Before you sign on the dotted line, here's a lesson in leasing lingo:

  • Upfront costs: Lease deals don't include anything called a down payment. Instead, you'll see the catchy phrase "capitalized cost reduction" -- either cash or a trade-in. There are also other upfront costs, like first- and last-month payment and a security deposit.
  • Monthly costs: Lease payments are usually lower than purchase payments, because you only have to pay for the part of the car that you use during the years of the lease. You will also have to pay something called the rent charge, lease charge or money factor. This is similar to an interest rate when you're financing a car.
  • Maintenance costs: Keep in mind, you are responsible for maintaining and repairing the car, even though after two to five years it won't be yours anymore. Some lease deals include maintenance but may charge you a deductible each time you go to the shop.
  • Penalties: You may have to pay fines for moving away from the area where you leased the car or for turning the car in early, among other possible penalties.
  • End-of-lease costs: Many leases contain yearly mileage caps of 12,000-15,000. Exceed the cap, and you could be forced to pay up to 25 cents per mile for every extra mile you've traveled. You may also owe money for extra wear and tear on the vehicle. If you want to buy the car at the end of the lease, you'll have to pay for the car and pay a fee for that privilege. Well, isn't that special? If you don't want to buy the car, you may have to pay a vehicle disposition charge for the dealer to prepare your car for sale.

To Be a Savvy Consumer…

Do your homework:

  • Decide whether leasing or buying is best for you. (I believe buying is usually a better financial choice.)
  • Negotiate the price of the car before you negotiate the terms of the lease.
  • Keep in mind that you are responsible for the costs of maintaining and repairing the car, even though after two to five years it won't be yours anymore. Some lease deals include maintenance but may charge you a deductible each time you go to the shop.
  • Before agreeing to the deal, read and understand the handy one-page leasing form required by federal law and the pages and pages of details. Ask the car dealer if you can take the paperwork home and study it. If the dealer says no, march right off the lot.

Where to complain:

Oddly enough, the Federal Reserve regulates vehicle leases and all lease transactions that last more than four months. You may not get personal help from the Fed, but complain anyway. Allen Greenspan's successors need to know how their rules are working in the real world. Also complain to the Department of Motor Vehicles, the Motor Vehicle Dealer Board, the Better Business Bureau and your state and county consumer protection offices.