How to buy or lease a car


This report looks at how to buy or lease a car, and includes an overview and sections on buying a new car, customer satisfaction, leasing a car, buying a used car, and typical costs.


Shopping for a car can be a rational process or an emotional odyssey. There are practical considerations like overall performance, safety and reliability. And there are abstract

considerations like aesthetics and image. Whether you buy or lease, new or used, the more your practical side prevails, the better your chances of getting the best transportation at the lowest price.

New or used? Industry sources estimate that nearly two out of every three cars sold last year were used cars. It’s easy to see why. Compared with a good-quality used car, a new car is a poor investment. Some large and expensive sedans lose nearly half of their original value in their first three years. Such models make especially good used-car deals, because the previous owner has taken the biggest hit in depreciation. In the years that follow, those same models depreciate much more slowly.

Since a used car costs less, you may also save money by paying cash and avoiding finance costs. And insurance coverage on a used car is cheaper. But the choice of new versus used goes beyond dollars & cents. Important benefits of buying new include the reliability that the car’s newness conveys and the warranty the car comes with. A used car may have been driven abusively by its previous owner, or vital maintenance may have been neglected. Furthermore, a used car will have used up at least part of the factory warranty. Dealers may provide their own warranty on a used car, but it’s often not as comprehensive. And if you buy from a private owner, you buy as is. Shopping carefully can lessen your odds of buying someone else’s lemon.

Another pitfall in buying used is that important safety features like dual air bags and antilock brakes were less common a few years ago. That puts an added burden on you to search out a used car that has all the latest safety equipment.


The brand you buy can affect your satisfaction with the deal. According to our readers who responded to questions about car-buying satisfaction in our Annual Questionnaire, some dealers just do it better. And as the table below shows, the best dealers aren’t always those who sell the costliest cars.


A lease deal could be as good as a purchase deal, but it often isn’t. A big problem is the unfamiliar terminology used in leasing contracts. For example, instead of “down payment,” leases refer to “capitalized-cost reduction.” Besides using confusing language, some salespeople use unethical sales tactics, like convincing people to pay what amounts to more than the full sticker price for their leased car. Some of the tricks reported to consumer-protection agencies are downright illegal, like cheating people out of the credit for the car they trade in, or even leading them to believe they’re negotiating a loan when they’re actually signing a lease deal. New disclosure language mandated by the government is a step in the right direction. But it still won’t force leasing companies to disclose all the information you need to comparison-shop.

How leasing works.

When you sign a lease, you make the deal with a car dealer, who acts as a representative of a leasing company. That company may be the finance arm of an automaker (Chrysler Credit, Ford Credit, GMAC), or it may be a bank or other financial institution. After you sign the lease, the dealer sells the car to the leasing company for the price you negotiated. Your monthly payments (which cover depreciation, interest charges and any state taxes) go to the leasing company, not to the dealer.

The lease spells out a term, typically two or three years, and the amount of each monthly payment. Usually, it also quotes a “residual value,” nominally, an estimate of what the car will be worth at the end of the lease term. Your monthly payments are calculated roughly on the basis of the difference between the car’s initial price and its residual value. With a standard “closed end” lease, you can walk away from the car at the end of the lease or, if the lease includes a buying option, you can buy the car. Don’t sign an “open end” lease, which requires you to make up any shortfall between the residual value of the car, as projected in the lease, and the actual value at the end of the lease.

Automakers that want to boost sales can subsidize leases (“subvent,” in leasing parlance) by having their captive finance companies offer a high residual value. That means lower monthly payments, which can be a good deal for you if you walk away from the car at the end of the lease.

Be prepared to live with the terms of the contract. For example, if you exceed the mileage limit, you may have to pay as much as 25 cents per mile for the excess. So estimate your mileage needs carefully. A 12,000-mile limit is typical, but you can negotiate a higher limit if necessary. Resolve to take good care of your car to avoid steep “excess wear and tear” charges. And be prepared to stick it out for the full term of the lease, since terminating prematurely can set you back thousands of dollars.

Shopping for a lease.

It’s best to keep an open mind, approaching aautoshw1.jpg leasing deal as if you’re buying the car. Follow the buying advice offered above. Ask several dealers for their best purchase price, and bring up leasing only after you have the lowest price. Then you can compare and decide which is best for you. Also, check the newspapers for ads offering factory-subsidized leases. Even if the car models offered aren’t ones you want, the ads will give you an idea of the deals that are available.

Throughout the negotiations, make sure the capitalized cost (the price of the car) is no higher than the purchase price you negotiated. Ask what “money factor” is used to work out the monthly payments. Multiplying the money factor by 2,400 gives the approximate interest rate. Make sure GAP (Guaranteed Auto Protection) insurance is included at no extra cost. If the car were stolen or destroyed, GAP insurance would cover the difference between the book value of the car and what you owe on the lease.

Before you sign the contract, ask to take it home for careful study or expert advice. Be sure you understand everything. The vehicle identification number in the contract should match that of the car you want. And see that the automaker’s warranty covers the full term of the lease. If important information is missing, have it added. Terms like “excess wear and tear” should be defined clearly.

Used-car leasing. Although it’s growing even faster than new-car leasing, used-car leasing still accounts for a very small proportion of used-car transactions. A used-car lease offers the major attraction of a new-car lease: low monthly payments. But it also combines the disadvantages of leasing with the disadvantages of buying a used car. You may have scanty information about what you’re really paying and how it’s derived. And you’re taking a chance on the car’s reliability. You also give up the thrill of driving a new car, one of leasing’s major selling points. Before you consider leasing a used car, calculate how much it would cost you to buy the car instead.

Learning Leasing Lingo

  • Acquisition or bank fee: A fee paid to the dealer or bank to initiate the lease.
  • Capitalized cost: Price of the car plus all items and services in the lease.
  • Capitalized-cost reduction: Down payment.
  • Closed-end lease: Lets you walk away from the car at the end of the lease without paying for the shortfall between the residual value stated in the lease and the actual value of car.
  • Disposal or disposition fee: A fee you pay if you don’t buy the car at the end of the lease.
  • Excess wear and tear: A fee you pay for repair of any damage to the car at the end of the lease.
  • GAP insurance: Guaranteed Auto Protection. Pays off balance on the lease and early-termination penalties if car is damaged or stolen.
  • Lease charge or money factor: Interest rate on the difference between the vehicle’s price and its residual value. When multiplied by 2,400, it closely approximates the annual percentage rate.
  • Open-end lease: Requires you to make up any shortfall between the residual value stated in the lease and the actual value at lease’s end.
  • Purchase fee: A fee you pay if you buy the car at the end of the lease.
  • Purchase-option price: The price you must pay if you decide to buy the car at the end of the lease.
  • Residual value: An estimate of the car’s value at the end of the lease.
  • Subvented lease: A lease that’s subsidized, usually by the automaker.


New-car leasing has been a boon to used-car buyers. As those leases expire, more and more two-and three-year-old cars are flooding the market, increasing your choices. So keep your options open.

The reliability record of a car model is important, and that’s where Consumer Reports readers can help. Their experience with the half million or more cars they tell us about each year in our Annual Questionnaire serves as a unique guide to how well those cars have held up over the years, and how well they’re likely to hold up in the years to come. Refer to “Finding a Reliable Car” for specifics on more than 200 cars and light trucks, going back as many as eight years.

Check used-car prices before you shop. Such information is available from the Used Car Price Service, as well as from printed guides at newsstands, libraries and banks, and on the Internet.

You can buy a used car from:

  • Superstores and new-car dealers. Used-car superstores have huge lots. Typically, you sit in the office and choose from hundreds of vehicles on a computer monitor. Also typically, superstores feature no-haggle pricing and on-site financing. Chains such as CarMax, AutoNation USA, Car America, SmartCars and Driver’s Mart Worldwide are regional, but they may be national soon. Others are independent. Superstores and new-car dealers often feature the cream of the crop in used cars. But prices may be high.
    A relatively new development is the “certified” used car, sold with a special warranty from the automaker rather than the dealer. These are supposed to be the very best used vehicles, reconditioned to the automaker’s specifications. Whether such vehicles’ premium quality matches their premium prices remains to be seen.
  • Independent used-car dealers. Prices are apt to be lower here, but quality may be lower, too.
  • Service stations. If they’ve serviced the car, they can recount its history, a plus. If you’re a regular customer, that may be an added incentive to give you a fair deal. Selection will be limited, however.
  • Private owners. Expect the lowest prices and the biggest risks. A car sold by a dealer must have a “Buyer’s Guide” sticker with warranty information. Read it carefully. If you’re buying from a private party, ask to see service records and the warranty booklet. Such records are an indication that the car has been serviced and maintained properly. No matter how clean the car looks, have a mechanic inspect it thoroughly (cost: about $60 to $100). If the mechanic finds flaws, ask for a written repair estimate. In your negotiations, you can ask that the cost of repairs be deducted from the car’s price.

Before you take a car to your mechanic, you can perform a few simple tests to eliminate an obvious clunker:

  • See that body panels line up properly. Misalignment indicates accident damage.
  • Check for rust, especially under the doors, in the trunk and in the wheel wells.
  • Watch out for odometer readings that don’t jibe with the car’s condition. The odometer may have been rolled back illegally. A low odometer reading and severe pedal or upholstery wear are a danger signal. So are brand-new pedal pads. Open the driver’s door and jiggle it up and down. Loose hinges may indicate high mileage. Watch out for sagging springs in the driver’s seat.
  • Try all the controls, check the displays, and make sure all the accessories work.
  • Check under the car for leaks.
  • With the engine idling, jiggle the steering wheel back and forth. There should be no more than a couple of inches of play in the steering wheel before the front wheels turn.
  • On a level road, the car should track straight without constant steering corrections.
  • The engine should accelerate smoothly. Coast from about 15 mph to 5 mph in low gear, then floor the accelerator.
  • A cloud of blue exhaust smoke indicates an oil burner.
  • Signs of transmission wear (in an automatic, a lag between the engine’s acceleration and the car’s; in a manual, a clutch that slips or doesn’t engage smoothly).
  • On a straight, level road, try a series of gentle stops from 30 mph. Watch for pulling to one side.


Buying and leasing deals vary widely, depending on how good a negotiator you are. Following are some typical costs, after three years, for buying and leasing a car with a $20,000 negotiated price.


costs are for a five-year, $15,000 bank loan at 9% interest, with a lump-sum payment of balance of loan after three years. LEASE figures are for a three-year lease with a 0.003390 money factor (equivalent to 8.17% APR) and a 65% residual value at end of lease.


Initial cash outlay (Taxed and first-month
lease payment excluded)

$20,000 $5,000 $1,500

Sum of monthly payments over 36 months

$0 $11,210 $10,173
Final payment on loan $0 $6,816 $0

Opportunity cost
(How much the money spent on the car would have earned if it were saved to keep pace with inflation of 3% per year)

$1,881 $975 $626
End-of-lease fee $0 $0 $100
Total cost $21,881 $24,001 $12,399

Minus value of car after three years

$10,534 $10,534 $0
TOTAL CASH COST $11,347 $13,467 $12,399

Copyright Consumers Union of U.S., Inc., April 1997