If you’re in need of a new-to-you set of wheels, you have a few options: Buy new, buy used, lease, or continue to bum rides from your friends. About 1 in 5 cars on the road are leased. What does that mean? And how do you do it? (And is it for you?) Don’t worry. We know what we’re doing.

This is for you: If you like to buy a new car about every three years, if you don’t have the money to buy the car, or if you like driving a nicer car than you could otherwise reasonably afford. It’s also helpful if you don’t put tons of miles on your car (most leases cap mileage at 10,000 to 15,000 miles per year), and if you take very good care of your wheels, inside and out.

Pros: Your down payment and monthly payments will be lower than they would be if you purchased a new car outright.

Cons: If you plan to keep the car for the long haul (i.e. longer than three years), buying is the better deal. And since you don’t own the car when your lease expires, you don’t have equity to use toward your next car purchase.

Hands-on time: A couple of days that may include visiting various dealerships, test driving cars, choosing a model you like, doing the leasing price research, and negotiating a deal.

Total time: Depends on how quickly you want or need to lease a car. The process could be accomplished over a weekend or over a matter of weeks if you’re feeling leisurely.

Cost: Varies according to make and model of vehicle

How it works:

* A car’s value doesn’t go up while you drive it—it goes down, or depreciates. Car leasing is based on the concept that you pay for the amount by which a vehicle’s value depreciates during the time you’re driving it.

* Depreciation is the difference between a vehicle’s original value (the capitalization cost, or cap cost) and its value at the end of the lease (called the residual value).

* The residual value of a car is stated as a percentage of the MSRP (Manufacturer’s Suggested Retail Price). A 36-month, 50-percent residual on a new $20,000 car means that the car is estimated to be worth $10,000 after you’ve driven it for three years.

* So if you’re considering two different $20,000 cars, where one is worth $15,000 after two years and the other worth only $12,000, the first car will cost less to lease because of its smaller depreciation amount.

* A typical lease might look like this: $22,000 cap cost, 36-month lease, 8 percent interest. Like getting a loan, you will pay interest on a leased car. It’s expressed as a money factor or lease factor or lease rate, and it will always be a small decimal, like .00297. Convert that number to an APR by multiplying by 2400.

* Lease factors should be comparable to new-car loan interest rates. The better your credit rating, the lower the APR you should be able to land.

* You’ll typically make a small down payment—usually less than 20 percent of the car’s value—followed by monthly payments for the term of the lease.

* When the term expires, you return the car to the dealer. Done.

What to do:
1. Start the process as though you’re shopping for a new car. New car dealers are the logical place to begin, and you should shop around and test drive as many cars as possible. Find one you like.

2. Do not say the word “lease” yet. Act as if you’re planning to buy the car.

3. Once you’ve found a model you like, go home and compare lease offers. (You may want to start on Edmunds.com.) Calculate how much money you have available for a down payment and how much you’d be willing to pay every month. (Tip: You’re better off making a smaller down payment—or no down payment at all—and a higher monthly payment, if you can. That way, if you total the car when you drive it off the lot, you’ll be out less money.) Use this car lease calculator if you need help.

4. Go back to the dealer and start negotiating for the car. Again, don’t mention that you’re planning to lease the car until you’ve agreed upon a final price.

5. Aim to negotiate a price that’s less than MSRP. For $14 per vehicle, you can look up the car’s wholesale price (what the dealer paid for it) at ConsumerReports.org. Start at that price and work your way up.

6. Don’t let the dealer distract you by talking only about monthly payments. Focus on what you’re going to pay, total, for the car.

7. Once you’ve settled on a final price, tell the dealer that you’d like to lease the car.

8. Your dealer may imply that price isn’t negotiable on a lease and that you have to pay the sticker price on the car, but that’s not true. If they stick to that line, take your business elsewhere. However, price is sometimes all the dealer can negotiate, because other elements (such as the residual or down payment) may be controlled by the leasing company.

9. When choosing a lease term, pick one that’s no longer than the general coverage warranty that comes with the car. That way, you’re covered for the entire lease if something breaks.

10. Agree on a contract, and make sure you read it—and understand everything. (Don’t be afraid to ask questions. It’s a big purchase.) There should be a detailed description of what would count as “excessive wear and tear” and what the company would charge for it.

11. Look for the following items, which the lease must include, by law:

• Capitalized cost (the purchase price)
• The interest rate
• Up-front fees and taxes
• Credit provided for used-car trade-ins, if any
• Estimated residual value
• The amount to be depreciated

12. The contract may also include a purchase-option fee, which would allow you to buy the car when your lease ends for a predetermined price. You can decide whether it’s worth it to pay for that option.

13. If it’s not already included in the lease package, you will be offered “gap insurance” or a “gap waiver.” If your car is stolen or totaled, a gap waiver covers the difference between the current market value of the car and what you still owe on the lease—which may be thousands of dollars apart. This is often standard, but if it’s not, the additional cost is up to you.

14. Pay your bills on time and take good care of the car. Follow the recommended manufacturer maintenance schedule. And don’t text while you drive. (Our public safety message of the day.)

To learn more:
Buying Vs. Leasing (Edmunds.com)
Car Leasing and Buying Glossary (LeaseGuide.com)

Did you do it? Tell us what worked or share other tips in the comments below.

Who helped: Al Hearn, president of LeaseGuide.com

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