Leasing isn't for everyone, but for some it makes perfect sense. Be cautioned, though, because leasing can be more complex than buying.

On this page, you'll learn the key terms of leasing, the pros and cons, questions you should ask, things to watch out for, leasing laws designed to protect you, and leasing tips. If you still can't decide, try Bankrate's interactive calculator to learn where you fit in the equation.

Capitalized cost and residual value
It's important to know that the two keys to leasing are the final negotiated price of the vehicle, also known as "capitalized cost," and the "residual value," what the dealer or lender predicts the remaining value of the car will be when the lease expires.

Leasing can be a good move if you're someone who wants the very latest make or model, drives fewer than 12,000 to 15,000 miles a year -- the standard limits in most leases -- and really drives carefully and takes care of the vehicle. Leasing generally offers lower monthly payments or allows a customer to drive an upscale car for what they might pay for a basic sedan.

Knowledge and strategy are the keys to negotiating a good leasing deal. Ignorance -- not knowing terminology or how the lease works, or not being told all of those details by the dealer or lease company -- is the main factor in paying too much for a lease. In Florida alone, the state attorney general's office has identified 40 types of fraud in leasing. Most rely on customer ignorance to work. State attorneys general, consumer groups and lawyers claim that an uninformed would-be leaser could be hurt by as much as $4,000 in a single lease.

One thing to keep in mind: A lot of drivers pay thousands more to lease the same car they went in to buy. Commonly, these buyers are talked into a lease without understanding all the details. To find out if leasing makes the most financial sense for you, use Bankrate's interactive calculator.

Leasing gives dealers more places to give and take than buying does. Make sure you are perfectly clear on every step along the way and know exactly what you are paying, when and for what, before you sign a lease.

What you are doing in a lease is paying for the difference between the value of the car brand new on the showroom floor and the amount the dealer predicts it will be worth when you bring it back at the end of the lease; this is called the residual value. Call the bank or dealer to find the residual value. Most cars have a residual value of between 50 and 58 percent for a 36-month lease.

The capitalized cost is not so easy to get a handle on. The dealer sets the figure and often establishes it at the MSRP. However, that doesn't mean you have to accept that as the final figure. Just as you can usually negotiate down the MSRP in a purchase, you can negotiate down the capitalized cost in a lease situation.

The capitalized cost should also be reduced by any trade-in, down payment or a manufacturer's rebate. It can be increased if you trade in a car that you owe a balance on or by acquisition fees charged to obtain the loan.

But beware: The dealer can set the capitalized cost higher than the MSRP. This may happen when you're trying to lease a car that is a particularly fast-selling model, just as they place a premium price (over MSRP) on hard-to-get models. If you see the capitalized cost is higher than the MSRP on the car, you should know why and think twice about the deal.

You should also use the capitalized cost figure for comparison-shopping lease deals from different dealers. But that's not the only basic question to have answered with complete clarity when you bargain.

Remember that a lot of numbers have to line up, just like buying. No down payment is fine, but that saving will probably be balanced out in the costs somewhere else in the lease. So perhaps a down payment and a different lease length or better mileage allowance would be a better deal for you.

Your lease may allow you to purchase the vehicle when the lease is up. Find out what the costs would be (it is usually the residual value stated in the lease). That figure, plus your total costs from start to finish of the lease, will tell you what it will cost to own that car in three years (or whatever the lease term is) down the road.

Before you lease, consider whether you would buy the vehicle at the end of the lease. You may have no intention of doing it, but consider this "emergency planning" and know what it would cost, just in case. If the figure is outrageous, maybe you're not looking at the best lease deal.

And always remember to read every single word and number in the lease -- and be sure you understand them -- before you sign anything.

Key questions to ask
OK, you've decided a lease might be good for you. And you've hammered out a deal. But before you sign, make sure you know the answers to the following questions:

• What is the amount due when I sign the lease? It can be made up of payments like security deposit, titles fees, capitalized cost reduction, monthly payments paid at signing and registration fees.
• How long is the lease? It's common to find 24, 36, 48 and 60 months. But you will also find odd terms -- like 39 months. Make sure you keep track of your numbers; some odd-month deals may be designed to confuse you. A 39-month lease based on the 36-month residual value of the car will give you lower payments, but you'll pay more overall. And you might be driving for three months without a factory warranty so a major breakdown could cost you big time in repairs.
• What happens at the end of the lease? There are two kinds of leases: open-end and closed-end. The most common is the closed-end lease in which you return the car at the end of the lease, pay any costs due and walk away or buy the car at the residual value figure stated at the start of the lease. If the car is not worth the residual value figure at that point, you're not responsible as long as the car has normal wear and you haven't exceeded the mileage limits. The dealer is guessing that he will get back a vehicle worth money to him (the residual value), so he takes the risk (and maybe loses if he guesses wrong). That means you pay more for this type of deal.
  • Open-end leases are far less common. Sometimes called a finance lease, in this case you are doing the guessing. Your payments will be lower than a closed-end deal. In an open-end lease, the residual value is set, but it's only considered an estimate of the future value of the car -- hence open-ended. If at the end of the lease the car is not worth the estimated residual value, you pay the difference. Disagreements over that fair market value -- usually assessed by someone assigned to the job by the dealer -- can lead to some unwanted hassles.
  • In both cases, read all the small print. You may think you only have to pay certain charges at the end of a lease, but there is ample anecdotal evidence of people being surprised at additional end-of -lease payments. For example, did you agree to pay a "disposal fee,'' a payment you make when you give back the car? And be sure you understand exactly how the dealer decides what is "normal wear and tear'' and "excess wear,'' and get him to put it in writing. You can also re-lease the car (effectively leasing a used car with a whole new deal) or trade in any value left in it toward a new lease.
• What is the free miles allowance and what happens after that? Commonly, leases allow 12,000 or 15,000 miles before you trigger charges per mile (anywhere from 10 to 25 cents). Remember that the miles allowance is often negotiable!
• What will gap insurance cost me? This insurance will pay the difference between what you owe on your leased vehicle and what it is worth if it is wrecked or stolen. You can get it with the lease or ask your insurance company.
• What is my trade-in worth and how will it be applied to the lease cost? It may become part of the money you pay before you get into the lease, or it may help lower monthly payments. Make sure before you sign that you can see where the trade-in money has been applied to what you are paying.
• What happens if I default and can't make a lease payment or want to bring it back early? Okay, so you don't expect that to happen, and neither does the dealer. But ask! You may want to know how you can keep the car through one troubled month when you can't pay; find out how that would be handled. But you may have to give up the lease and then you'll face an early termination charge. Find out what that would be.
• Can the lease be extended? You can usually keep it going, month by month at the same price. But be sure that will not change the terms of the original lease or bring potential new costs into play when you finally turn it in.
• What is the "money factor?'' This is what we might call the cost of the money you are putting into the vehicle -- an equivalent to the interest rate you would pay on a new car. The "money factor'' will be a fraction that seems bewildering and meaningless to many people. But multiply it by 24 and you will have an indication of the interest rate you are paying for the lease. That rate should be very close to the interest rate you would pay for a new car.
• Can I lease a used car and save money? Yes. And a used car has already lost a huge chunk of it original value, a hit you don't have to take. But beware! The basic rule of thumb says don't lease something too old -- a car that has just come off a two-year lease may be the best bet, and make sure both the current capitalized value of the car and the estimated residual value at the end of the lease are fair -- something much more difficult to do with a used vehicle. Just like buying, leasing a used vehicle means those payments will be lower!

Here are the 10 biggest booby traps of auto leasing:

1. Mileage monkeyshines: Most leases are written to allow a certain number of miles each year. Often, dealers offering low-cost leases cash in by setting this mileage limit low -- say, 10,000 miles annually. Typically, the charge for each mile over the limit is 10 cents to 20 cents per mile. Say you drive 13,000 miles instead of the 10,000 allowed each year for three years. At 20 cents for each extra mile, you'll owe $1,800 at the end of your lease (9,000 excess miles times 20 cents per mile). That's an extra $50 a month.
2. Early-termination tangle: Some dealers lure customers into a new lease by touting their ability to get you out of your existing lease before its term is up. And they can, but you'll pay dearly. In some cases, you may have to pay the difference between what the car is worth, and what you've already paid for it.
   • Say you're leasing a $20,000 car. After two years, you've paid $2,400 on it. However, the car has depreciated to $16,000. To terminate the lease, you'll probably need to pay the difference between what you've already paid ($2,400) and the amount that the car has depreciated ($4,000) or $1,600. What's more, some leases require you to cover any remaining payments. If you have more than just a few months left on your lease, these payments will quickly add up.
   • While the lessor may talk about "wrapping" or including these fees within a new lease, that's not the smartest way to go. You'll end up paying much more, because you're financing the amounts over a longer time period.
3. Residual-value ruse: A critical factor in leasing a car is called the residual value -- how much it will be worth when the lease ends. For instance, the lender may figure that a car selling for $20,000 today will be worth $10,000 three years from now, and will calculate monthly payments to cover that loss in value. Different lenders calculate residuals differently. Ideally, the residual is the average used-car value from a standard like Kelley Blue Book or NADA . A lower residual value means higher monthly payments. A $15,000 residual value on a $25,000 car would mean your lease payments would have to cover the $10,000 difference. In a 36-month lease this would mean monthly payments of $277.77 ($10,000 divided by 36), not including interest, taxes and other fees. If another lender predicts that the same car will be worth only $13,000, your monthly payments will be $333.33 ($12,000 divided by 36). A lower residual value is not always bad, however. If you decide to purchase the car at the end of the lease, you'll pay the lower residual value, plus any purchase-option fee.
4. Down-payment double-cross: Many lease ads boast about low monthly payments while hiding a huge down payment figure in the fine print. Remember, your real lease payment isn't just the amount you write on your check each month. You also need to factor in the down payment. If you put down $4,000 on a 36-month lease, you should understand your real cost per month is about $111 more than your monthly payment ($4,000 divided by 36 months). A dealer, then, could set the monthly payment on a car incredibly low just by jacking up the down payment. After all, if you made a big enough down payment, you wouldn't have to make any monthly payments at all.
5. Purchase-price ploy: Some dealers try to entice you into a contract by comparing the payments you would make under a lease agreement to the payments you would make to purchase the car. Remember, there should be a big difference because at the end of a purchase term, you own the car. At the end of a lease, you own nothing.
6. Price-doesn't-matter pitfall: Don't believe that because you're leasing, rather than purchasing a car, you don't need to worry about the price of the car. You do. Your monthly lease payment is partly based on the price of the car. Example: A car selling for $24,000 (or having a capitalized cost of $24,000) will have a residual value of $12,000 in three years. You'll need monthly payments of about $333 to cover the depreciation ($12,000 divided by 36 months). But if the starting price was $22,000 -- and the residual value remains $12,000 -- the monthly payments drop to about $278 ($10,000 divided by 36 months). Each month, you hang onto an extra $56. Be especially wary that the starting price (capitalized cost) is not more than the MSRP.
7. The fee flim-flam: Before you sign on the dotted line, you'll want to know the amount of fees, in addition to your monthly payments. These can include acquisition, purchase option and disposition fees. Acquisition fees, sometimes referred to as document fees, are charged at the beginning of a lease. They typically run about $500. A disposition fee is charged when you return the car. As its name implies, this covers the dealer's cost to dispose of the car. These fees usually are several hundred dollars. Finally, a purchase-option fee is the amount it will cost to purchase the car at the end of the lease. The exact amount can vary. While these are one-time fees, they still affect the overall cost of the lease. You'll want to negotiate everything and consider them in your computations when deciding which dealer to use.
8. Hidden-cost hoodwink: Don't automatically assume the monthly lease payment you're quoted is the amount you'll actually be paying. It may be quoted without sales tax or license. Ask what other ongoing charges will come into play, so you don't suffer sticker shock when you make your first payment.
9. Tricky-term trap: Manipulating the term of the lease is one of the easiest ways for the dealer to get you to accept their deal at an inflated price. Let's say you have your eyes on a small SUV with a sticker price of $25,000. You negotiate the selling price down to $22,000 and the dealer says the residual value is $12,000. That means your 36 monthly payments -- not counting taxes, interest and fees -- would be $277.77. But you try to get the price down by telling the salesman you can only afford $250 per month. He goes and talks to his manager and comes back a half-hour later with the good news -- $250 it is. But the term of the lease has gone from 36 months to 40 months -- which he may or may not point out at the time. All that's happened is the term has been extended -- you haven't saved one red cent.
10. Interest-rate razzle-dazzle: There is no such thing as an annual percentage rate on a lease. It doesn't matter what you see in an ad. The APR (annual percentage rate) listed either is illegal, inaccurate or not an APR.The razzle-dazzle comes in when the salesman or dealer tries to confuse you about APR and what's called a "money factor.''

The money factor is similar to an interest rate and determines how much you'll pay in finance charges over the life of a lease. The higher the money factor, the more you'll pay in finance charges. It's expressed as a decimal such as .00260. To convert to an equivalent interest rate (APR), simply multiply by 2400.

An unscrupulous salesman might boast about an interest rate with an APR of 2.6 percent. Then he applies the money factor of .00260 to his calculations and you think you're paying 2.6 percent interest or APR. But if you do the math you'll see that .00260 multiplied by 2400 equals 6.24 percent. That's the equivalent APR, not 2.6 percent.

You might want to work this backwards. If a dealer, for example, tells you they can equal the rate you've been offered by a bank or credit union, simply take the rate the lending institution offered and divide it by 2400. Say you were offered a rate of 6 percent by your credit union. Divide it by 2400 and you'll get the money factor of .0025. Then ask the dealer for the money factor and if it's higher than .0025 you know the interest rate is higher than 6 percent.

When visiting a car dealer for the purpose of leasing, ask them about the money factor on their leases. It is not something that is routinely disclosed. In fact, it is not even disclosed in most car lease contracts. If you don't ask, you'll never know. If a dealer refuses to disclose this important information to you, find another dealer.

Before you sign a lease, you must be given a detailed, written statement of everything you have to pay or may have to pay. You must also be told about any upfront money you have to pay, such as down payments, registration or security deposits.

The leasing company must also tell you how many payments you have to make, how much each payment will be and when the payments are due. And the company statement must show you what all of the numbers equal -- your total cost.

The law also says you must be given details of other lease requirements. For example, if you have to take out a certain type or amount of insurance.

If the vehicle has a warranty, you must be told exactly what it covers and for how long. The company has to tell you who is responsible for servicing the car.

You must also be told wear and tear will be assessed when you return the vehicle and how will they decide if the wear and tear is covered by your lease or if you must pay because it is greater than you agreed to. By the way, the law also says that wear and tear standards must be reasonable.

Any terms that would let the company end the lease must also be explained. You must also be made aware under what circumstances the leasing company can demand their vehicle back or can change the terms of the deal.

If you opt for a lease in which you can buy the vehicle at the end of the contract, the leasing company must tell you -- in writing of course -- under what circumstance you can buy it and what it will cost you.

If your lease has a balloon payment in it, remember that the law says it can't be any more than the total of three regular payments, unless you agreed to pay more when you signed, or you've put more miles and/or wear and tear on it than you agreed to.

You've seen how lease prices are calculated based on capitalized cost and residual value, the difference between open-end and closed-end leases, the pros and cons of leasing and the booby traps of leasing.

For more frequently updated information and advice on leasing. visit CarBuyingTips.

Also, be aware federal law requires dealers to provide lease cost information before you sign the contract. Take a copy of the federal consumer leasing act disclosure form to the dealer and ask them to complete it. If they won't, run, don't walk, to the nearest exit.

If you're trying to work out a lease and having trouble with the math, try our auto leasing worksheet or our lease cost calculator.

For a complete list of auto leasing terms, consult our leasing definitions page.