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11 Things to Know Before You Lease a Car

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

Disclosure : By clicking “See Offers” you’ll be directed to our parent company, LendingTree. You may or may not be matched with the specific lender you clicked on, but up to five different lenders based on your creditworthiness.

Nearly one quarter of new cars in America are sold under lease agreement, and low monthly payments entice buyers who want to drive new cars, but don’t want to deal with a large cash outlay.

Lessees don’t build equity in their vehicle, but for the right person, a lease can be a good option. These are things you need to know before you consider a lease.

1. The best way to think about a lease

It’s best to think of a lease as a pay for use contract. A lease allows you to pay for the depreciation you put onto a vehicle at a reasonable interest rate. You get to drive and depreciate a vehicle for a certain period of time then you can walk away.

Due to higher markups, higher interest rates and additional fees, leasing tends to be an unfavorable financing mechanism, but if you don’t care about owning the car, a lease may be a good option for you.

As a lessee, you will drive the car during its most rapid depreciation phase, so in the long run, continuously leasing a vehicle is the most expensive way to drive, but if you always want to drive a new car, leasing can be a low hassle way to make that happen.

2. Leasing affects your credit score

Taking on a lease affects your credit the same way that taking on a car loan affects your credit. Applying for a lease triggers a credit inquiry on your report, which has a small adverse effect on your credit score. Taking on a lease increases credit utilization which also adversely affects your credit score. Over time your credit utilization will fall, and timely payment history will cause your score to increase again.

Leases are considered installment loans, and having a high utilization rate on installment loans does not have as much of an adverse effect on your credit score as having high utilization on credit cards or other forms of revolving credit. As with any form of credit, late or skipped lease payments drag down your score

Further Reading: Credit Score Guide

3. Leasing terminology

Manufacturers and salespeople shroud leasing in complex jargon. To understand the terms of your lease, these are the definitions you need to know.

  • Capitalized Cost: The price of the vehicle. This could be MSRP (Manufacturer’s Suggested Retail Price), or it could be reduced based on your negotiations.
  • Capital Cost Reduction: This is a down payment. The most favorable leases (for those who don’t intend to purchase at the end of the lease) should not include a capital cost reduction unless it’s an incentive.
  • Residual Value: This is the estimated value of the car at the end of the lease. The higher this price is relative to the capitalized cost, the more favorable it is to lease a car. Cars.com keeps a database of residual values on file that you can use to understand if you’re getting a fair residual value.
  • Factor, Money Factor or Rate: This is the interest rate of your loan, but it’s not expressed as an annual percentage rate. The number expressed needs to be multiplied by 2.4 to get to an APR. For example a 1.35 money factor is a 3.24% interest rate. LeaseHackr.com keeps an up to date list of “official” factors (column entitled MF) that you can use in negotiations. Interest rates on leases range from 2-3 times as high as interest rates on traditional car loans, but it is possible to negotiate this rate.

4. You can negotiate a lease

Unlike car loans, leases come from car manufacturers rather than banks. However, this doesn’t mean that it’s impossible to negotiate a lease. Anyone who intends to lease should try to drive down the capitalized cost, and people with good credit should also look to reduce or even eliminate the money factor. Small fees like documents fees, tire fees and more can be waived completely if you take the time to negotiate.

Even if a dealership advertises a “Manufacturer’s Leasing Special”, you should negotiate the terms of the lease. Salespeople depend on getting you to drive away in a new car, so consumers hold upper hand in negotiations.

5. No money down

One advantage of leasing a vehicle is that it shifts depreciation risk from the customer to the manufacturer. A down payment (or a capital cost reduction) shifts the risk back onto the customer. In a lease, a down payment is a form of pre-payment. If you terminate the lease before the end of the lease period (if your car is totaled or stolen), you lose the benefit that the down payment purchased. Putting no money down is an important strategy for keeping the lease in the lessee’s favor.

6. Extra insurance costs

Leasing yields lower monthly payments compared to buying using traditional financing, but some of the monthly cash flow advantage is lost by increased insurance costs. To protect themselves financially, lessees should purchase “Gap Insurance” in addition to traditional car insurance.

Gap insurance covers the difference between the actual cash value and the amount owed on a lease. As soon as a lessee drives the car off the lot, the car is worth less than the lessee owes on their lease. If a car is totaled or stolen during a lease period, you need to be able to buyout the lease early, and gap insurance allows you to do that. Gap insurance should be purchased through a traditional insurer, and adds anywhere from 3-10% to the traditional cost of insurance.

7. Fees, fees, fees

Every lessee runs into at least three substantial fees during the course of their lease. The first fee is an acquisition fee (alternatively called a financing fee). This fee is not a down payment, but it runs anywhere from $500 for basic compact cars to nearly $1,000 for luxury vehicles.

Dealerships also charge a $300-$900 Delivery Charge which covers the cost of the vehicle being delivered to the dealership lot. Lessees need to be prepared to pay this fee upfront, but some companies try to sneak a second delivery fee into the contracts. The second delivery fee can be negotiated to zero.

The last fee every lessee will encounter is either a disposition fee or a purchase option fee. These fees run between $300-$400 depending on which option you choose. When a lease ends, you will pay a fee to the dealership unless you negotiate it away at the outset.

In addition to these larger fees, many lessees will run into mileage overage fees which range from $.15 per mile for basic vehicles to $.30 for luxury vehicles. Most people drive more than their lease allows, and these extra miles cause additional depreciation on the vehicle. Since a lease is a “pay for what you use agreement”, it’s fair to pay for those extra miles. Of course you can avoid overage fees by limiting the amount you drive or by purchasing the car at the end of the lease.

You should negotiate smaller fees like advertising fees, tire fees, document fees, vehicle preparation fees down to zero.

8. Repairs required

Lessees bear the financial burden of repairs and maintenance on their leased vehicles. Some dealerships offer free tire rotation and oil changes, but the lessee has to pay for other maintenance. New cars shouldn’t require much maintenance, but accidents, chipped paint and broken windshields need to be paid for, and longer lessees may need to buy new tires while they own the vehicles

9. Exit options

Turning in a leased vehicle early is akin to defaulting on a car loan. Your credit will take a hit, and you will still owe money. However, it is possible to “sublet” your car through websites like SwapALease and LeaseTrader.

If your lease is about to end, you’ll have to decide whether or not to purchase the car or return it. If you want to buy the vehicle, you may be able to negotiate the buyout price. If you have the cash on hand to pay for the vehicle, and the purchase price is lower than an equivalent used car, you can purchase the vehicle outright and sell it for instant equity. If you have to obtain financing, the additional fees may erase any favorable pricing you obtained.

If the vehicle is worth less than the purchase price at the end of your lease, you should probably walk away from the vehicle or attempt some strong negotiations. Of course, the beauty of a lease is that the termination of the lease means that you can hand the keys back to the dealer and move on. 

10. Consider leasing if…

Anyone with midterm vehicle needs (only needing a vehicle for a few years) may find that a lease is a good value and a good fit for their lifestyle. Likewise, anyone who loves driving new cars and doesn’t mind having a monthly payment may enjoy leasing long term.

Continuously leasing vehicles is more expensive than “driving a vehicle into the ground,” but many people don’t mind that they get what they pay for.  People who enjoy driving newer, fancier cars may find that leasing can be a reasonable lifestyle, especially if they can easily afford the payment.

11. Avoid leasing if… 

Avoid leasing if you’re trying to drive as inexpensively as possible. The low monthly payments are enticing, but leasing is the most expensive way to drive in the long run. Leasing has high interest rates and high fees. If you can’t afford the monthly payments associated with owning a new car, consider buying used or choosing a basic model. Both of these methods end up being cheaper than leasing.

If you drive a lot, or if you frequently drive in poor conditions, you’re a bad candidate for leasing. The additional depreciation may mean that you’re left paying extra fees at the end of your lease. Additionally, anyone seeking to own a vehicle should pursue paying cash or taking out a traditional loan rather than leasing.

If you decide to purchase your vehicle instead of leasing it, it is best practice to get pre-approved for your auto loan before heading over to the dealership. [Disclosure: LendingTree is the parent company of MagnifyMoney.]We recommend starting with LendingTree. There are hundreds of lenders on this platform. After filling out your application, you will be able to see real interest rates and approval information at once.

Keep in mind, some lenders will do a hard pull on your credit and this is normal within the auto lending space. Multiple hard pulls only count as one pull, so it is smart to have all your hard pulls done at once, which LendingTree’s tool can do for you.

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LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Hannah Rounds
Hannah Rounds |

Hannah Rounds is a writer at MagnifyMoney. You can email Hannah here

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This Is What You Should Know About Private Party Auto Loans

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Buying a used car can be a tricky process, from getting approved for financing to checking out the history and maintenance of the vehicle. But what happens when you want to buy a used car from a person rather than a dealership? Before you purchase the car you’ve been eyeing, it’s helpful to learn the ins-and-outs of private party auto loans, where to shop around for them and how to make sure you are getting the best deal.

Here are some guidelines on how to navigate the used car industry and get the most competitive interest rate for your auto loan.

What is a private party auto loan?

A private party auto loan is one option for would-be car owners purchasing a used vehicle from an individual, rather than a dealership. Those who don’t have the savings to pay for the car will need to seek financing from a lender who offers private party auto loans.

Where can you find private party auto loans?

There are many lenders who offer private party auto loans, including banks, credit unions and online lenders. These lenders have their own specific requirements for things like minimum credit score, income and down payment, and could also have a maximum limit on the age of the vehicle and the number of miles it has accumulated.

APRs for used vehicle loans are also generally higher than ones for new cars. Used cars depreciate more in value because there is more mileage on the vehicle, along with more wear and tear on the engine, tires and other parts. The lender is taking on more risk and, in turn, charges a higher interest rate.

The length of a private party auto loan is similar to that of loans for new and used cars that have been purchased directly from a dealer.

Steps to take before you buy

After you’ve narrowed your search to the vehicle you want to purchase, you should start shopping around on how to finance it. Decide how much money you want to put toward a down payment from your savings or if the trade-in value of your car will be sufficient. The more money you have for your down payment, the lower your monthly payments will be.

Another important factor to look out for is the interest rate for your potential loan — a lower interest rate means that more of your money goes toward the principal of the loan. Make sure you compare auto loan rates from various lenders, including banks and credit unions. Banks will sometimes give a better rate if you are already a customer, though the lowest rates are often offered by credit unions — see if there is one in your neighborhood that you qualify for if your employer does not belong to one.

You’ll also be able to find out which lender offers the lowest APRs by comparing them online. You can compare rates from up to five auto lenders with LendingTree’s online marketplace by entering some basic personal information.

LendingTree
APR

As low as
3.09%

Terms

24 To 84

months

Fees

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.

Still, one important thing to remember is that each time a lender checks your credit score, your overall score will be impacted. Coordinate your searches for auto loans only when you are ready to make the purchase so that they occur within a 14-day period, which has less of an impact to your credit score.

The way to determine the best price for a particular brand and model of a vehicle is to compare selling prices from industry standards, including the the National Automobile Dealers Association, Kelley Blue Book and Edmunds. These guides are also helpful if you’re trading in your car and want to use the proceeds for a down payment.

Until you are ready to purchase a vehicle, continue to shop around on auto marketplaces or dealer websites. They could offer a discount for cars in different colors and features that may not be a priority for you.

Save your online research and show an individual car owner what other dealers are offering. Show them what their competitor’s price is and see if they are willing to lower their price.

Alternatives to a private party auto loan

Obtaining a personal loan is an option, especially for car owners with lower credit scores or shorter credit histories. Personal loans are typically used by consumers to pay off high-interest debt, like credit cards. An individual could apply a personal loan toward the purchase of a used car, along with a down payment, instead of seeking a private party auto loan.

However, while personal loans allow an individual to borrow a set amount of money for a fixed period with a fixed interest rate, their interest rates are often higher than an auto loan that has collateral (the car itself). These loans usually range between 24 and 60 months.

Another option is a home equity loan. You can qualify if you have enough equity in your house, which is used as collateral. These loans, available from lenders including banks and credit unions, can be used for various purposes. Once you are approved, the lender will give you a lump sum of money, which can be used toward the purchase of a vehicle.

You’ll make monthly fixed payments when you receive a home equity loan, similar to how a traditional auto loan works.

The bottom line

Car buyers have several loan choices they can make before committing to a major purchase. Private party auto loans are another common option to finance your vehicle. Once you’ve chosen the vehicle of you want to buy from another individual, you should check your credit history and the value of your current trade-in, and decide whether you’re able to make a down payment.

Start shopping around for private party auto loans to get the best interest rate and a lower monthly payment.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Ellen Chang
Ellen Chang |

Ellen Chang is a writer at MagnifyMoney. You can email Ellen here

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No Money Down Car Loans: Do They Exist?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Buying a car can be a frustrating experience. Between shopping, filling out paperwork and figuring out the down payment, the process is stressful for many. Thankfully, there are many options available for car buyers, even for people with poor credit, those who can only make a small down payment (or none at all) or someone who does not have a trade-in vehicle. But beware that you’ll often pay a higher APR in these circumstances.

How your interest rate is affected

The best APRs typically are given to people with higher credit scores who have a down payment or trade-in.

Individuals who have a poor credit score because they do not have a long credit history or did not pay their bills on time in the past will most likely be offered a higher APR from a lender.

Someone who does not have a down payment — or only has a small amount like $100 — will also likely pay a higher APR. So what can you do?

How to negotiate for a no-money-down car loan

If your credit score is poor — which can be defined as between 550 and 649 — and you do not have a down payment, you can make your case that you are a good candidate for a car loan by talking up some other factors.

Explain how long you have been employed at your current job. Lenders like to see that you have steady employment because it means you have regular income and can hopefully make payments each month. Staying with one company for an extended period shows that you are more reliable and do not have gaps in income.

Another factor that makes you look more responsible is maintaining the same apartment or residence for at least a year. This shows that you make monthly payments and could be reliable.

Keeping your debt to a minimum and having multiple offers can also help in your negotiations.

You can also now boost your credit score by allowing your cellphone, cable and utilities payments to be included in calculations. Separately, you can show a positive payment history by obtaining a secured credit card.

Shop around for a no-money-down car loan

Do your homework for the right loan and the right car. Start by comparing auto loan rates from lenders online or talking to your credit union or bank where you have a checking or savings account.

Shopping around for an auto loan is the only way to know which lenders offer the best APRs. Just getting one or two loan offers, or relying on the one from the dealership means you could be missing out on savings.

LendingTree
APR

As low as
3.09%

Terms

24 To 84

months

Fees

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

LendingTree is our parent company. LendingTree is unique in that they allow you to compare multiple, auto loan offers within minutes. Everything is done online. LendingTree is not a lender, but their service connects you with up to five offers from auto loan lenders based on your creditworthiness.

After you have multiple loan offers, choose the one with the best APR because a lower interest rate will save you money during the life of the loan.

You can fill out a short online form and compare rates from up to five auto lenders through the LendingTree online marketplace. It’s important to remember that while some lenders conduct a hard pull on your credit, getting multiple hard pulls will count as just one if within a 14-day span.

You may have had your eye on a certain brand and model of a vehicle for several months, but make sure you are getting a fair price by comparing selling prices, including through Kelley Blue Book, Edmunds and the NADAguides. You can use these guides if you are trading in your vehicle.

Don’t just go to the auto dealership where you bought your last car or the one you drive by often. It’s easy to look up dealers online and see the prices for which cars are being sold.

Being flexible can help you save more money — even a different color could save you hundreds of dollars.

Dealerships want to sell you a car, so show them what their competitor’s price is and see if they will match or beat it.

Other tips

You can negotiate for a better interest rate if you can save a small down payment. Lenders prefer receiving even a few hundred dollars as a show of good faith toward a new loan.

If you can not provide a down payment, even a trade-in of an old vehicle might help you get a no-money-down car loan at a fair interest rate.

Getting pre-approved for an auto loan can help you walk into a car dealership with confidence and secure you the lowest APR.

The bottom line

Even though purchasing a car can be a complicated experience, doing some research can make the process easier and faster, even if a buyer can’t put any money down on a loan.

You can avoid some major headaches if you shop around for a vehicle, check your credit score, see how much your current car’s trade-in value is and determine if you can provide a down payment.

You, as a car buyer, have several choices before committing to a major purchase.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Ellen Chang
Ellen Chang |

Ellen Chang is a writer at MagnifyMoney. You can email Ellen here

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