One-third of all car sales are car leasing contracts. That is a big chunk of the automotive pie. This mini-guide will explain what it means to lease a vehicle and why it might be the right option for you.
Leasing a vehicle is an alternative to buying a car outright, and it is essentially a long-term rental. The terms for a lease agreement usually range between three to five years.
What does it mean to agree to an auto lease, and how does that differ from buying a car?
Pros Of Car Leasing
Apparent from a large number of overall car sales being lease agreements, there are a lot of reasons why you should consider taking out an auto lease instead of buying a vehicle.
Here are the pros that accompany leasing a car:
New or newer cars get leased because they have the highest return. Dealerships know that you don't want to lease (essentially rent) a used vehicle with a lot of mileage, but they also don't want to keep a clunker running to try to sell it off at the end of a lease.
Remember, it always comes down to value for the customer, and for the leaser or dealer, it always comes down to mitigated risk.
In this case, both the value and the mitigated risk work out. Leasing a new or newer vehicle is valuable to the customer, and since it has a better probability of maintaining its longevity, it is less risky for the lender netting you a better price.
That means you always get to drive around in style!
If you are strapped for available cash but need a vehicle, leasing a car could be the answer to your predicament. Usually, when you buy a car, even new, you need a substantial down payment.
Fortunately, when you lease a car, you generally have a significantly lower down payment than you would need if you were financing a vehicle.
However, don't think that paying more as a down payment is off the table. Lenders love when you can offer a higher down payment because it adds to your capability to make the monthly payment; plus, they are getting more money upfront, and who doesn't like that?
If you can provide a higher down payment on a vehicle, it will lower your overall payment and possibly your monthly payment.
Although, if you don't have a large sum of money for a down payment, that's okay, too, as the necessary amount to take home a leased vehicle is generally lower than bringing home a financed vehicle.
When you purchase a car, even if the vehicle is not luxurious, you could have an exuberant monthly payment depending on your financial situation. Plus, when you buy a car, you are stuck with that monthly payment for years as your car depreciates.
Yet, when you lease a car, you often have a lower monthly payment, and if everything works out, at the end of the lease, you will be able to lease another new (or newer) vehicle. Therefore, you are paying less per month with a maximum depreciation of three to five years. After that, you have the option to get another new or newer car.
Why is this the case?
Leasing a car is not the same as buying a car, because you are not paying for ownership, you are paying the depreciation value. Yes, there are other fees associated with this monthly payment, but ultimately, you are paying for the value of the car decreasing as it is driven and is aged.
That way, at the end of the lease, the leaser can still sell the car outright and turn a profit instead of coming up even (or short) for a depreciated vehicle over the last three to five years.
What is one of the best reasons to rent a home instead of buying? You take on less responsibility and risk. If something significant in the home breaks, most renters can call their landlord to have them fix the issue.
The same concept applies to leased vehicles. When you enter a lease agreement, the warranty covers that vehicle throughout the lifecycle of your lease.
Unless you have a complimentary maintenance program from the car manufacturer, you will still need regular maintenance. However, if something substantial malfunctions with the car (depending on your warranty) you might not need to worry about paying out of pocket. Under certain warranties you are not responsible for abnormal defects you experience throughout the life of your lease.
Cons Of Car Leasing
While there are plenty of positive aspects of leasing a car, there are also cons to car leasing. As with anything, your situation will ultimately dictate the decision that is optimal for you.
Here are some of the less-glamourous aspects of leasing a car to help you make an informed decision:
Since you are leasing the car and do not own it, you will likely need to get more insurance to cover it. The reason is simple: the car isn't yours.
Thus, if you do total the car, you will be responsible for the balance of the vehicle (not the balance of the lease agreement.)
Getting more insurance, including GAP Insurance, means that you pay a higher premium. So, make sure you factor these additional expenses into your monthly payments before agreeing to take on a lease.
One of the main differences in buying and leasing a car is the mileage. Mileage is the main factor in determining the value of a vehicle. The more mileage there is on a car, the more wear and tear the car sustains.
So, it makes sense that there is a mileage allowance dictated by the lender. Yet, if you surpass that allowance, the lender charges an additional fee to cover the additional depreciation.
Fees are a significant consideration when it comes to choosing a lease over financing a vehicle.
Of course, there are what are considered default charges, such as late payments, when you buy a vehicle. However, these fees and more are almost unavoidable when you lease a car.
Here are some of the fees that you should be aware of before agreeing to a lease:
Disposal fees: This fee incurs if you decide against purchasing the vehicle at the end of the lease.
Wear-and-Tear Fees: Wear-and-tear is normal for a car. Yet, some lease agreements have a certain threshold of wear-and-tear that is acceptable before you incur a fee.
Early Termination Fees: While exceptions are possible, for most leases, there is an early termination fee associated with the agreement. This arrangement is fair, though, as the lender expected to get a certain amount throughout a specific time period, and now they are not receiving that full amount. Nevertheless, it is frustrating to have to pay to get rid of a car you don't own.
Can You Ever Own The Car After Leasing A Vehicle?
Yes, there is a lease agreement option that exists, which will allow you to buy the car at the end of the agreement.
Here are the details on the different types of standard car leasing agreements:
Purchase Option Agreements are self-explanatory. With this option, you can buy your car at the end of a lease.
To help you with this decision, you should look at the residual value versus the market value. When you sign up for your lease, the dealership gives you a residual value, which is the lender's quote of what the car will be worth at the end of your contract. Once your vehicle is nearing the end of your lease, check the market value, which is the amount the car is worth.
Depending on the difference between the two values, you could be getting a great deal.
This lease agreement is the most common type of lease. There is a date that the lease starts and ends on. This option is excellent for people who are strictly leasing their car because you know exactly when you need to have the vehicle returned and how much you will pay during that period.
A Single Payment Lease is an attractive option because you pay the total amount of the lease in one payment. Yet, you do not own the car. You lease it. The only difference is you do not have the monthly payment. Plus, you will likely get a better deal than if you were to engage in a traditional lease agreement.
Agreeing to lease a vehicle can be a freeing experience, as it gives you a mode of transportation, without the ultimate responsibility of 'owning' a car. (Plus, you have the option to change your car out every three to five years.)
Yet, leasing a vehicle isn't for everyone, just like owning a car isn't for everyone. That is why you must always research your options and apply the information you learn to your current situation. Therefore, you can make the best decision for you and your family.
