5 costs to consider before leasing a car

Leasing a car, an SUV, or a pick-up truck can be the perfect choice for many people. Monthly payments are often less than those for purchasing a vehicle, drivers can get a brand-new car every couple of years, and concluding the lease can be as simple as turning in the keys.

But a number of costs and fees, not to mention the terminology, can make the prospect daunting and confusing. Anyone considering leasing a vehicle needs to read the fine print, understand the lingo, and get the answers to lots of key questions—what do the various costs mean, how are they calculated, what's reasonable and what's not, and can they be negotiated?

The difference can mean finding a great deal or getting stuck with a sour deal that's overpriced, cumbersome, or just plain upsetting. Save yourself the hassle and headaches by learning to understand how car leases work, and how they can work best for you.

CoPilot compiled a list of five essential costs to consider, in addition to upfront costs, when thinking about leasing a car. These numbers help estimate the true cost of a lease, as well as any fees that may be accumulated during the leasing period.

Residual value

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Residual value is the estimated wholesale value of the vehicle when the lease comes to an end. It's also sometimes called the lease-end purchase price or the lease-end value. Set by the company that finances the lease, residual value takes into account likely depreciation, typical demand for the make and model, and projected market conditions.

Residual value plays a role in determining the size of monthly payments—if a new car is valued at $35,000 and has a residual value of $20,000 after three years, the cost to lease is $15,000 plus fees, interest, and taxes over those three years. So, the higher the residual value, the lower the monthly costs.

Money factor

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In a car lease, the money factor is the part of the monthly payment that goes to the financing cost. Comparable to interest costs in mortgage payments, it's sometimes called a lease factor, lease fee, or factor. For those seeking to lease a car, a good credit rating will help lower the money factor. To understand the money factor in terms of an annual percentage rate, or APR, multiply it by 2,400. For example, a money factor of 0.0029 is the equivalent of a 7% APR.

Mileage fees

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One decision to make when leasing a car is selecting how many miles you expect to drive it. Three-year leases typically offer options of 10,000, 12,000, or 15,000 miles annually. Exceeding the number of miles selected will trigger mileage fees. The fees tend to range between 15 cents and 30 cents per mile. Experts say it generally makes more sense to choose a higher yearly mileage option than to pay the fees. Also, driving fewer miles than expected could mean the vehicle will have a higher trade-in or sale value.

Drive-off and other fees

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For a car lease to take effect, the person leasing the car must pay drive-off fees upfront. These fees might include a security deposit and costs associated with the local department of motor vehicles. They might also include the first monthly payment, documentation costs, and sales tax. The drive-off fee also might include cash paid at the start, to lower monthly costs, that's known as a cap reduction payment. Drive-off fees are sometimes referred to as the out-the-door cost or the total due at signing.

Life-of-lease cost

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Life-of-lease cost refers to any fees or balance remaining if the lease is terminated early. Costs may include an early termination fee based on how much has been paid vs. the car's current value, transfer fees, vehicle disposal fees, and taxes, as well as any overdue payments and late fees.

The earlier a lease is ended, the costlier it will be. Less pricey options might be transferring the lease to someone else or buying out the lease in its entirety so you can buy the vehicle and then sell it. Under federal law, the specifics of ending a lease early must be disclosed when the lease period begins.