5 Myths About Leasing a Car

Don't believe everything you've heard. For many drivers, leasing can be a better deal than buying. Here's what you need to know before you head into a showroom.

Leasing often gets a bad rap, and no wonder: Its confusing argot sounds like fodder for a course in high finance, and dealers have been known to slip bad deals past confused car shoppers who simply wanted low monthly payments.

About 20% of new-car transactions are leases, but more people should be leasing. As interest rates rose, automakers shifted incentives from rebates and low-interest financing to leases. If you know what you're looking for and negotiate smartly -- and get over the five myths below -- leasing can be a good deal.

1. Buying is cheaper than leasing.

If you keep a car well past the day the loan is paid off -- or you paid cash to begin with -- you save money by buying. But if you trade in your car before the loan is paid off, the value of the trade-in is unlikely to cover the remaining balance on the loan.

For example, if you leased a new Chevrolet Malibu LTZ for three years, your monthly payments could be $489. When you turned in the car at the end of the lease, you'd pay a "turn-in" fee of $395 and then walk away. If, however, you bought the Malibu with a five-year loan at 7.9%, your monthly payments would be $546, and after five years you'd own the car free and clear.

But say you want another car after three years. To match the residual value written into a three-year lease, you'd probably have to sell the Malibu on your own rather than trade it in. Then you'd have to pay off the loan. Buying would leave you about $1,600 poorer.

2. It's nearly impossible to negotiate a good deal.

Leases are negotiable. But first you need a tour of the jargon:

• Capitalized cost. The vehicle price is called the capitalized cost. You should haggle over this just as hard as you would haggle over the price if you were buying.
• Money factor. Another crucial term is the money factor. The lower this number, the better (multiply it by 2,400 to get an estimate of the interest rate). Dealers are sometimes reluctant to reveal the money factor, so be persistent.
•  Residual value. Finally, the residual value is the value of the car or truck at the end of the lease.

An inflated residual value lowers your monthly payments, but it can also handcuff you.

A more realistic residual value will make it easier to sell the lease, trade your vehicle midlease or buy the vehicle at the end of the lease, says Tarry Shebesta, the president of Automobile Consumer Services, a leasing service in Cincinnati.

Ask the dealer to show you deals from several banks, focusing on the money factor and the residual value. You can also go to LeaseCompare.com to comparison shop and apply for a lease. Or check out LeaseWise: For $350, the service will shop five dealers in your area.

3. Only businesses get a tax break on leases.

Tax laws allow businesses to deduct monthly car-lease payments as expenses.

But most individuals get tax breaks, too. In most states, you pay sales tax only on the monthly payments, not the sale price of the vehicle. In the Malibu example above, you'd owe taxes on about $18,000 in payments rather than the $27,000 sale price.

Arkansas, Maryland, Minnesota, Texas and Virginia charge sales tax on the entire sale price.

4. You may have to pay hefty fees when you turn in the car.

The typical annual allotment of 10,000 to 12,000 miles is stingy, and the 18- to 21-cent-a-mile penalty for exceeding the limit seems daunting. But if you buy a car, you're also penalized for higher-than-average mileage when you trade it in.

You can probably negotiate a higher limit in exchange for a higher monthly payment and still save money.

5. If you want out early, you're stuck.

Several fee-based websites, including LeaseTrader.com and Swapalease, match people who want to get out of a lease early with those who want to assume a short-term lease. At LeaseTrader.com, for example, it can cost $80 to post a vehicle and $150 to complete the transfer of the lease.

Common Myths About Car Leasing

Below there are some of the most common misunderstandings about car leasing.

Car leasing is a dealer scam

In fact, leasing is a legitimate form of vehicle financing. It is not a dealer scam, even if dealers quite often benefit from the customers’ lack of knowledge about it. You have to understand that dealers do not traditionally make a lot of money from leasing unless they know that the customer does not know how to evaluate a deal. In fact, leasing has gotten a bad name from customers who have been involved into leasing as a way to lower monthly payments and then realized that here should have been some other considerations that the dealer did not disclose. The common reason why leasing causes some problems is that customers just do not know how leasing works as well as how to determine if leasing is the best option for them.

Leasing is for businesses

Even if car leasing is for businesses, personal car leasing has some benefits to those who qualify. The main purpose of leasing for business is preservation of cash and for tax deductions which is the other advantage. Businesses have much more productive users for cash than sinking it into devaluating assets like vehicles. The same is true for people who could have money that they would rather not invest into cars or who do not have money and need a low cost way of financing their vehicles.

In the case of car leasing you are not an owner of the leased car

This is true unless you decide to buy the car at the end of the lease. But, those who purchase with a loan do not own their cars till their loan has been completely paid. In addition, the value of a car at the end of the loan is reduced by the devaluation that it has suffered during the time the loan was being paid down. And the buyer no longer owns the part of the car that has been lost to devaluation, which is the same part that a leaser does not own.

Leasing Myths

There are so many reasons why not to lease a vehicle...or are there?  Many people have a stigma about leasing and then discover that many of their fears are just myths. Here are a few common examples...

Can I get out of my lease early?

Answer: Yes! You may purchase the vehicle outright at any time during the lease or you can also trade it in towards a new lease or the purchase of a vehicle!

I drive a lot of miles. Won't I have to pay a lot of money when I turn the lease in?

Answer: No! If you know you drive a lot of miles you can select a high mileage lease! 20,000 miles per year and up is no problem for a Toyota lease! You can also purchase the car outright at the end of the lease if you choose!

Don't I have to put a lot down at signing to get a lease?

Answer: No! We have leases where you don't have to put any money down at signing!

Aren't payments higher with a lease?

Answer: No! In fact many times the payment is 50%-70% of a normal monthly payment if owning the vehicle!

What about maintenance? Do I have to pay all the maintenance on the vehicle throughout the lease?

What do I do at the end of the lease?

Answer: If you still love your Toyota buy it outright! If you want to try out a newer Toyota model, lease another one! You could also trade in your leased vehicle as 90% of leased Toyota vehicles have remaining equity in them! You also have the option of just turning your vehicle in at the end of the lease and finding another car!

How can Community Toyota help you lease a new Toyota today?