Three Things You Need to Know Before Leasing a Car

Ignorance is no bliss. And the worst bit about life is that no one will cut you some slack because you ‘DIDN’T KNOW.’

While this doesn’t mean that you must be an expert in everything, it simply means that you must educate yourself on the essentials. Also, ask for help. No one will laugh at you for asking for information about something. And even better, a few hours spent browsing the internet will equip you with the knowledge you avoid costly pitfalls.

In the world of car leasing and lease contracts, there are things you should know before you lease the car. Don’t get started without knowing exactly how to lease a car.

1. Residual Value

A leased car’s residual value refers to an estimate of its value at the end of the lease period. When looking for the right car to lease, you need to go through the fine print to ensure that the lease allows you to enjoy the car’s benefits during and at the end of the lease.

A good car lease will be expressed as a percentage of the vehicle Manufacturer’s Suggested Retail Price or MSRP.

But why is the residual value essential? Well, a car with a high residual value means lower lease payments.

Keep in mind that when you lease a vehicle, your payment is the difference between the car’s selling price and its residual amount spread throughout the duration of the lease. With a high residual value, you will be left with a smaller difference.

Think of low residual value as a reduced value of the car at the end of the lease. In such cases, the dealership makes sure that your monthly payment is high enough to recoup the value of the car during its use.

2. Gap Insurance

You must take gap insurance for the leased car. With the gap being the difference between the amount owed on the lease and the car’s market value, gap insurance refers to the insurance you take on this difference.

For example, if you have to total the leased car before the expiration of the lease period, the dealership’s insurance company will value the car then pay this value to the owner of the car, the dealership. If the market value is lower than the total car’s value (when you opt to buy the car before lease’s maturity), the difference has to be paid out of pocket, unless you have gap insurance.

Since most people end up buying the cars they leased, we recommend that you get gap insurance when signing the lease documents.

3. The Money Factor

According to http://www.swapalease.com/lease101/guide/chapters/lease-basics/, one of the best ways of ensuring that you pick a favorable lease is by understanding the lease jargon.

The money factor is one of the things you should know. The money factor is often believed to represent the interest rate. It looks like 0.00125, but it is not the interest rate, per se. You have to multiply this money factor by 2,400 to obtain the lease interest rate.

Always ask for the exact money factor applicable to your lease and then convert it into the interest rate to determine if the rate is favorable to you or not.

In addition to the money factor, you should ask about the amount required upfront, and whether there are additional fees or not.