When you lease, you must choose between an open-end and closed-end lease. When you enter into an open-end lease contract, you bet that the car will be worth a certain amount at the end of the contract. This is known as the residual value. When you turn your car in at the end of the lease, it is appraised to determine its current market value. Once the value has been determined, you compare that number to the residual value assumed in the leasing contract. If the car's value is equal to or greater than the residual value, you owe nothing.

However, if the appraised value is less than the residual value, you must make up most or all of the difference in cash. Here's an example. If your contract says the car will have a residual value of $8,000 and the appraisal assumes it is worth $6,000 when the lease ends, you owe the leasing company $2,000. It's at that point where many lease contracts offer you the opportunity to purchase the vehicle at its residual value. Warning: Some leasing companies use a two-year residual value on a three-year loan, which can inflate the purchase price.

In a closed-end lease, you can return the car when the agreement expires and walk away from any further responsibility. Of course, you must bring the car back in good condition, but it is up to the leasing company to resell the car. Note: Because you are not responsible for the car's worth when the lease terminates, your monthly payments will usually be higher with a closed-end lease than an open-end lease.

Tip:
You don't have to accept a leasing company's first offer, just like you wouldn't pay full sticker price if you were buying a car. Bargain for your lease.

When leasing a car, ask for the following information:

• the amount of the security deposit due at the beginning of the lease, how much the first and last month's monthly lease payment is
• the date each payment is due, the total amount of payments over the entire term of the lease
• an exact amount of licenses, car registrations, taxes and maintenance costs
• specific definitions on what is meant by "normal wear and tear" and who is responsible for maintaining the car
• penalties for making late payments or defaulting on the contract
• the penalties for terminating the lease before it's scheduled to expire
• under what conditions can you and the leasing company cancel the contract
• the price you will pay for the car when the lease expires if you want to purchase the vehicle at that point
• whether or not you can opt for a contract extension clause, and how much lower your payments will be if you decide to renew your lease
• the type of auto insurance required and warranties that cover the car
• specific explanation of what happens if your car is stolen or you are in a car accident