Leasing is so very very bad unless you are a corporation... Leasing never used to be an option for individuals, but when car manufacturers realized just how poorly the average person understood how leases worked and how to use them, they discovered how much money they could stick people for.
Leasing was originally created because IRS rules for corporations made leasing much easier to account for. Basically, a corporation can deduct 100% of lease costs, but has to account for and depreciate owned vehicles over time. It's much easier to just lease since the money saved on accountants outweighs the higher cost of leasing.
Car manufacturers started leasing to individuals when they discovered that people would use it in effect to buy more car than they could afford, and often would also incur lots of penalties and fees along the way. They also discovered that they could mandate dealer service which would generate more money.
In general, people have no idea how to negotiate a lease, either. There are several terms to a lease that make up the final monthly amount.
First is the agreed upon value of the leased property. Most people just ignore this and the dealer puts the sticker price in the box. But, you can negotiate this. Negotiating a lower initial value with decrease the amount of depreciation over the life of the lease contract and lower that portion of the payment.
Second is the capitalized cost reduction, which is essentially you pre-paying some of the projected depreciation of the car. If you know for certain that you are going to buy the car at the end of the lease, it is okay to give the dealer a cap cost reduction as long as you know what you are doing. If you think you are going to turn it in, do NOT offer a cap cost reduction payment. I will explain why below.
Third, the value of the property at the end of the lease. This determines how much you have to pay in depreciation each month. The dealers often play with this number to change the monthly payment. They can make this number really high to reduce your payment, but then you have a much higher chance of having a large balloon payment at the end of the lease, in excess of the value of the car. This is NOT a position you want to be in because then you more or less MUST turn in the car, and that opens the flood gates for the "scratch and dent" fees. A lower end-of-lease value will result in you being in a good position to buy the car at the end of the lease or trade it in on another brand if the car is worth more than the "keep it" payment.
Fourth, the monthly rent. This is "free money" for the dealer, and like everything else, is negotiable. Again, they will play with this number to change your monthly payment.
So, here's the big caveat I mentioned before about cap cost reduction. Often, people just shop on monthly payment. In a lease, the dealer can in effect make the monthly payment whatever they want. They could even write you a zero-rent lease and you just pay the projected depreciation (fat chance of that unless you're a big corporation).
If you give the dealer a big cap cost reduction payment, the amount of depreciation in your lease will be lower, but they will probably try to take some of that back by increasing the rent, or increasing the end value (or worse, both!). In effect, if you gave the dealer a big enough cap cost reduction payment, they could screw you double by making the initial and end values the same, and your payment would be 100% rent! You have to be very careful.
Since most people who are shopping for leases shop only on their monthly payment (because they can't afford the car anyway), it is very easy to get screwed because the dealer will hide the real cost of the lease from you wherever possible.
Let's take an example, the 2008 3i Touring I bought a couple of weeks ago.
If I were going to lease the car, and I had $250/mo to play with at most, but I also have $3k in cash in my pocket. The sticker price was about $18,500, and let's say that I go for a 3 year lease. So, a 3 year old car with, say, 36k miles on it might be worth anywhere between 35 and 65% of the original value. This is a mazda, so let's go 40%.
The sales jock fiddles some numbers, and the depreciation on the car at a 40% end value is 11,100 over 3 years, or $308/month. Well, that's already more than I can afford, so the dealer has to start playing games with me. So, let's see what we can do for you, Mr Hidle. You can't afford this car, but I'll just do you a HUGE favor. Let me go talk to my sales manager.
He goes in the back, grabs a cup of coffee, and talks with some of the other sales jocks about last night's Lakers game. He comes back, sits down with his calculator, and figures some numbers. He punches in a 60% end value instead, reducing the depreciation to $7400, or $205 per month, then works in a monthly rent payment of $45, making your payment $250.
"He wasn't happy, Mr. Hidle, but we can write you this lease for $250, but we're going to need a cap cost reduction down payment of $3000 to do it."
"Great! I have that!"
So, he scribbles down some more numbers, takes your $3000, reduces the initial value to $15,500, making the monthly depreciation just $122. He then increases the rent to $128 to keep the payment at $250. He leaves the end-value alone at $11,100.
So, you have paid your $3000, you are paying $128/mo on rent, and after three years, you are going to either have to turn the car in, or pay $11,100 for a car that is likely worth about $7500, going another $3600 in the hole.
edit: BTW, what the sales jock didn't tell you is that he's only talking to you about the lease payment, not the other bills you are going to get, such as sales tax. In Pennsylvania, there is a 6% sales tax and a 3% car rental tax appended to your payment, and our nice sales jock didn't bother to mention that. It's not his problem anyway! So, your first bill comes in the mail, and lo and behold, it's $275 instead of $250! Ouch!
If you had purchased the car, negotiating the invoice price of about $17,200, putting your $3000 down (about $1000 against taxes), you'd finance about $15000 over 5 years at the promotional 4%, for a monthly payment of, get this, $275, and you would OWN it when it was all said and done. edit: (no, I didn't cook the numbers to make the payment come out the same. It actually just happened that way!)
Is this not clear to anyone? I should give seminars on this... hehe..
