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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. |
