When you lease a car you pay for the period that you use it. In other words, suppose a car costs $25,000 at the onset and it is leased for a period of 2 years. If its value at the end of 2 years were considered to be $13,250, you would have to pay $11,750. This amount would is payable in 24 equal installments with interest added.

When calculating the current value of the automobile, car-leasing companies take into account the capitalization price, also called the cap price or the lease price. This price could be lower than the manufacturer?s suggested retail price of the car, which is subject to negotiations.

The next step is the evaluation of depreciation during the period of lease. Depreciation is considered more in the first year of lease, about 30%. Then the next year it is 17%, a little higher than half of the first year. In the third year it is 8% and so on -- always-about half of the previous year. Depreciation is judged arbitrarily, as there can be no prediction about the future. The difference in the cap cost and the cost after considering depreciation is called the residual price.

Then comes the application of the interest rates. Every car has a number on it called the money factor. This money factor is a small decimal number that is multiplied by 2400 to give the interest rate. This interest rate is applied to the residual price, and it is divided in equal monthly installments.

Thus, when you lease a car, you can feasibly drive a new car every three years, or whatever period the lease is for. Financially speaking, a lease is cheaper than taking out a loan to purchase a car. If you pay some amount upfront, it makes the difference less and reduces the monthly installments. While leasing a car, it is better to make the lease period coincide with the warranty on the car. This way all the major repairs are covered by the warranty period. Leasing also proves less worry because once the lease period is over; you can simply trade it in and lease a new one. There is no hassle of having to get rid of the old car.

Like any financial benefit, leasing also has its problems. Even a zero percent lease is not zero percent. There is always a cost to be paid to the lease company. There are the taxes such as sales tax, deductibles, etc. There is even a tax on the monthly payment. Some leasing companies also set a limit on the mileage per year. If your car crosses that limit, then you end up paying extra to compensate for the wear and tear due to the extra damage. Lease companies may not refund the claim money if they think that the car has not been maintained properly. It is imperative to save all the bills of maintenances and repairs done to the car.

One should carefully weigh out the pros and cons before agreeing to leasing a car. Strictly speaking, there is no convenient way to wrangle out of a car lease. Trying to terminate a car lease before its period is over attracts hefty penalties and also spoils your credit record for your next purchase. It is essential to get all the facts about car leases before approaching a leasing company.