Auto leasing has exploded in popularity in the last few years, particularly as car buyers are being more challenged to find affordable automobile financing alternatives in a tough economy. It is a competitive market as people who want to buy or lease a car shop online and compare prices. From car sites that offer advance searches for you can find exactly what you want such as CarsAndTrucksOnDemand.com to websites that offer you lease advice on cars and car leases that are available to transfer or takeover like AutoLeaseTakeOver.com . The leasing market is an opportunity to take advantage of people who are stuck in their lease and want out.
Many automotive consumers don’t know how car leasing really works, or how to determine if it’s right for them. Many people now leasing are overpaying because they didn’t know how to get a good deal — or how to recognize a bad deal. Others who could greatly benefit from leasing are shying away because they don’t understand it or have misconceptions about it. It is important if you’re thinking about leasing a new car and want to understand how leasing works, or don’t know if you should lease or buy — or simply need help with your current lease — to educate yourself on used and new car leasing. Remember, knowledge is power — especially in car leasing!
Did you know that approximately 75 % of luxury cars are leased? For SUVS, new cars and trucks, approximately 25 % are leased. So why are so many people leasing? First, new cars prices have risen over the last few years making it hard on consumers. Second, the cost of living is rising and people need to look for ways to help their money do more for them, and leasing is one of their solutions.
In recent years, auto manufacturers and finance companies have come to the rescue with consumer car leasing programs. These programs are simply a modified version of business leasing that has been around for years. This helps explain much of the strange language and confusing concepts associated with consumer leasing today.
When you lease a car, there are many things to understand than just the price. There is the overall lease payment, the carrying costs, the buyout at the end, any admin fees at the beginning and at termination of the lease, and the cost to exceed the allowed mileage.
When you buy, you pay for the entire cost of a vehicle, regardless of how many miles you drive it. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract. Later, you may decide to sell or trade the vehicle for its depreciated resale value.
When you lease, you pay only a portion of a vehicle’s cost, which is the part that you “use up” during the time you’re driving it. Leasing is not the same as renting. You have the option of not making a down payment, you pay sales tax only on your monthly payments (in most places), and you pay a financial rate, called money factor, that is similar to the interest on a loan. You may also be required to pay fees and possibly a security deposit that you don’t pay when you buy. You make your first payment at the time you sign your contract — for the month ahead. At lease-end, you may either return the vehicle, or purchase it for its depreciated resale value.
Buy vs lease example
As an example, if you lease a $25,000 car that will have, say, an estimated resale value of $16,000 after 24 months, you only pay for the $9000 difference (this is called depreciation), plus finance charges, plus possible admin fees.
When you buy, you pay the entire $25,000, plus finance charges, plus possible fees.
This is fundamentally why leasing offers significantly lower monthly payments than buying
How are lease and loan payments different?
Lease payments are made up of two parts: a depreciation charge and a finance charge. The depreciation part of each monthly payment compensates the leasing company for the portion of the vehicle’s value that is lost during your lease. The finance part is interest on the money the lease company has tied up in the car while you’re driving it. In effect, you are borrowing the money that the lease company used to buy the car from the dealer. You repay part of that money in monthly payments, and repay the remainder when you either buy or return the vehicle at lease-end.
Loan payments also have two parts: a principal charge and a finance charge, similar to lease payments. The principal pays off the full vehicle purchase price, while the finance charge is loan interest.
However, since all vehicles depreciate in value by the same amount regardless of whether they are leased or purchased, part of the principal charge of each loan payment can be considered as a depreciation charge, just like with leasing — it’s money you never get back, even if you sell the vehicle in the future. It’s lost money for which you’ll have nothing to show.
The remainder of each loan principal payment goes toward equity. It’s what remains of your car’s original value at the end of the loan after depreciation has taken its toll. Equity is resale value. It’s what you get back if you sell the vehicle. The longer you own and drive a vehicle, the less equity you have. At some point in time, after the wheels have fallen off and the engine is worn out, the only equity left is scrap value. You never get back the full amount you’ve paid for your vehicle.
Because leasing is somewhat more complicated; with residuals, money factors, etc.; it shouldn’t be undertaken quite as casually as you might with a simple loan. There are more opportunities to misunderstand and make mistakes. Therefore, leasing requires that you be more careful and more informed.
One of the more important questions to ask before you lease is, what costs are involved if you want to break your lease or transfer it. Make sure you get an answer to this by the company you are dealing with because they may have unique policies, ie amount of admin fees, mileage, requires safety at your cost, and more. Get the answers before you sign. Overall, leasing is good and should be take advantage of.