Car Leasing for Beginners
Car leasing is extremely popular because it provides an
attractive method of driving an automobile that you might not
otherwise afford. It allows you to make lower monthly payments
than with traditional car purchase loans. About one out of every
four vehicles driven by automotive consumers in the United
States are leased.
But leasing is not for everyone. You should take the time to
learn about leasing, and be sure it’s right for you before
making a decision.
What is Leasing
While a purchase loan is a method of financing the ownership of
a vehicle, leasing is a method of financing the use of a vehicle
for a specified time period. As much as it sounds like renting,
leasing is different.
A lease is a formal contract with a leasing provider that allows
you to drive the provider’s car and only pay for the portion of
the vehicle’s value that you use up during the time you’re
driving it. You agree to pay for insurance, licenses, taxes,
repairs, and maintenance.
The leasing provider retains ownership and title to the vehicle
throughout the lease. At lease-end you can simply return your
vehicle to the provider, or you may purchase the vehicle and
continue driving it.
Benefits of Leasing
Leasing offers the following benefits when compared to purchase
loans:
- Lower monthly payments
- More car, more often
- Minimum or no down payment
- Smaller sales tax bite in most states
- No used-car headaches at end
Who Provides Leases
Contrary to popular belief, car dealers do not lease cars.
Banks, credit unions, and financial divisions of major car
manufacturers lease cars. Dealers simply act as agents of a
leasing provider, such as Ford Motor Credit or GMAC, to arrange
the lease on your behalf. Dealers typically work with more than
one provider.
Once you’ve picked out the car you want, the dealer sells it to
the leasing provider, who leases it you. It’s not necessary, nor
is it always the best choice, to use the “captive” leasing
company chosen for you by the dealer.
You can arrange for lease financing yourself with an independent
leasing company, bank, or credit union after you’ve negotiated
price with a dealer. Some lease providers even work with dealers
to acquire vehicles for you at reduced prices, saving you money
and the stress of negotiation.
Who Should Lease
Leasing makes sense for many automotive consumers, but not for
others. Here’s how to determine if you are a good leasing
candidate:
- Are you willing to trade ownership of your vehicle for lower
monthly payments? Leasing is a great way to lower your payments
or drive a better car for your money, but you must be
comfortable with having no ownership of your vehicle, unless you
purchase at lease-end.
- Can you stick with your lease until the end? Leases require
you to commit to driving your vehicle for a specific number of
months - typically 24, 36, 48, or 60 months. If you feel your
lifestyle, your finances, or simply your taste in cars may
change significantly in future months, you may not be a good
lease candidate. To end a lease early is usually troublesome and
costly.
- Do you drive more than 15,000 miles annually? If your answer
is yes, you may not be a good candidate because lease contracts
are typically written with an annual mileage limit, typically
10,000-15,000 miles. If you drive more that the specified number
of miles you will pay a fee for every mile over the limit.
- Do you typically keep your vehicles in good condition and
change vehicles every few years? If so, you may be right for
leasing. Lease providers require you to keep their vehicle
maintained and repaired, with no more than normal wear and tear.
If you don’t, you’ll be charged at the end of your lease.
- How is your credit rating? If you have a history of paying
your bills on time and don’t have excessive debt, you are a good
lease candidate. Otherwise, you may be required to make a large
down payment and pay higher finance charges or, worse, be
refused the opportunity to lease.
Shopping for a Lease
The most important element of a good lease deal is the price of
the vehicle. Regardless of whether you buy or lease, you should
always get the best possible price first. When leasing, this
price becomes the capital cost, or “cap cost.” Prior loan
balances and fees may be added. Rebates, discounts, down
payments, and trade-in credit are subtracted. The lower the
capital cost, the lower your monthly payment. This is the only
element of a lease deal that a dealer directly controls.
The remaining elements of a lease - money factor, residual
value, and related fees - are controlled by the lease provider
and are not negotiable.
Since a lease is simply another form of financing, interest
charges apply. These interest charges are known as “money
factor.” Money factor is expressed as a very small number such
as .00375, which is equivalent to 9% annual interest rate.
Again, a small money factor results in lower monthly lease
payments.
Residual value is an estimate of a vehicle’s wholesale value at
the end of a lease term. The longer the lease, the smaller the
residual value. Your lease payment is primarily determined by
the difference between cap cost and residual value, which is the
amount that the value of the vehicle depreciates during the
lease. The higher the residual value, the lower the lease cost.
Sales tax may also be included in your monthly payment,
depending on the state you live in.
You can easily calculate car lease payments, once you know the
key factors, using this Lease Calculator by LeaseGuide.com.
Leasing Fees
There may be certain fees associated with your lease. The fees
that lease providers charge vary both in kind and amount. One of
the most common is an “acquisition fee”, which is an
administrative charge for the work in initiating a lease.
Another common fee is a disposition fee, usually charged at the
end of your lease when you return your vehicle.
You may also be charged at the end of your lease for excessive
mileage, damages, and unusual wear-and-tear.
At the beginning of your lease, you will be asked to pay the
first month’s payment, a security deposit, a down payment, if
any, and applicable miscellaneous fees associated with licensing
a vehicle in your state. You will also be asked to show proof of
insurance.
Driving Your Leased Vehicle
Your vehicle must be driven and cared for according to the terms
specified in your lease contract. Generally, this means keeping
the vehicle in good condition, using it for lawful purposes,
maintaining insurance, and allowing it to be driven only by
licensed drivers.
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About the author:
Al Hearn is founder, owner, and operator of www.LeaseGuide.com, a source of information and advice for automotive consumers who are interested in car leasing. LeaseGuide.com has provided help to thousands of visitors since 1995.
