Car Leasing Basics

Car leasing is a contractual agreement allowing you to use a vehicle for a fixed period of time under specified terms rather than purchasing the car. Stated another way, it is a financing arrangement in which you make a down payment, monthly payments, and maintain the car until the lease period ends at which point your return the car to the lessor.

Car leasing has become very attractive to consumers since it is a more affordable method of vehicle financing than purchasing. It allows you the luxury of always driving late model, newer cars rather than owning one car until it is old and worn out. Roughly 20% of the cars driven in the United States are leased cars.

Though the monthly payments for car leasing are lower compared to traditional auto loans, leasing isn’t the best option for everyone. Before you sign a contract for a lease, it is essential that you check the benefits, criteria for leasing, and possible complications you may encounter during the lease period.

Also, be sure to check the monthly payment to find out if it suits your budget.

Your Responsibilities As A Lessee

Once you’ve determined if you can afford leasing a car, it’s important to understand your responsibilities. You must:

  • Make monthly payments for using the vehicle during the lease period.
  • Agree to maintain the vehicle as specified in your lease contract.
  • Pay license fees and taxes while keeping your car insurance up-to-date.
  • Return the vehicle in a condition that is specified in your agreement at the end of the lease term.
  • Agree to pay additional charges in case of damage and other incidents that are not stipulated in your lease agreement.

Benefits of Car Leasing

With these responsibilities in mind, let’s consider the benefits of car leasing:

  • Low down payment – The greatest benefit of car leasing is it doesn’t require a huge down payment. The monthly payment is also low compared to purchasing a new vehicle, thus, this strategy should easily fit in your monthly budget. The saved money can then be invested for capital growth.
  • Lower sales tax – When you consider leasing, there are some tax advantages. For example, when you purchase a new vehicle, sales tax is due immediately. When you lease the sales tax is spread throughout the lease term since tax payments are only calculated from your monthly payments and on your capital cost reduction.
  • Drive a nicer car for your money – Since leasing typically comes with low monthly payments, you will get the chance to drive a newer, more expensive car for any given amount of monthly budget. When you get offers from car dealers, calculate your monthly payment using the Car Lease Calculator to check if the car of your choice is perfect for your budget.
  • Get new vehicles more often – It is easier to change vehicles at the end of the lease term. You don’t have to worry about the sales value and disposal of your old car. No muss, no fuss. Very convenient.
  • Get excellent warranty coverage – If there is ever a problem with your car or things break down it is usually covered under the manufacturer’s warranty.

The Downside of Car Leasing

  • No ownership – When the lease term expires, you return the car. You’re essentially a renter and never own anything or build equity.
  • Higher overall cost – The cost of several leases will likely exceed the total ownership cost of single car held over the same amount of time.
  • Mileage and damage penalties – If you drive a lot of miles or have an accident the damage and excess mileage penalties can be very expensive.
  • Inflexibility – If your life situation changes and you need to return the car before lease expiration you could face a stiff penalty.

How To Make Sure A Car Lease Is The Best Deal

Leasing your next car may be the best deal depending on your situation and needs. Here are some factors to keep in mind.

  • Transportation or ego – If your vehicle is more than just practical transportation – (i.e.) you place a high value on driving the latest, coolest car – then leasing can make sense.
  • Low Mileage – If you don’t drive a lot – usually less than 10,000-15,000 miles per year – then leasing can make sense.
  • Price First – When shopping for your vehicle don’t mention that you intend to lease. Negotiate price for purchase first as if you are buying because your lease will be based on the purchase price of the vehicle. Negotiating the purchase price down when they think you are a buyer will then lower your lease payments as well.
  • Start at wholesale – Know the dealer’s wholesale price before negotiating and work up from that amount. Remember, the dealer profits from a variety of incentives besides the sales price so try to get as close to wholesale as possible.

Final Thoughts

Before you sign the lease agreement, make sure that you understand all your responsibilities as a lessee and the terms stipulated in the contract. Read the fine print. Ask the dealer to spell out all regulations and requirements ahead of time to avoid confusion.

Finally, verify the car dealer’s lease calculations using this car lease calculator to make sure everything is right before you commit to the contract.

Car Lease Terms & Definitions

  • Purchase Price – How much you pay for the car.
  • Down Payment – The initial amount paid to the dealer that is subtracted from the purchase price to determine the amount financed.
  • Term – The length of the lease in months.
  • Trade-in Allowance – The value of your old vehicle that you are trading for the leased vehicle.
  • Sales Tax Percentage – The tax percentage you pay during the lease term.
  • New Car Interest Rate – The interest percentage of the loan.
  • Residual Value – The value of the car at the end of the lease period. This value is sometimes used in calculating the amount you need to pay for the car in case you want to purchase it at the end of the lease term.
  • Wear and Tear – The stress on the car caused by normal use.
  • Depreciation Fee – The amount reduced from the value of your vehicle due to age, mileage and wear.
  • Monthly Payment – The amount you’ll pay for leasing a car every month until the end of your lease term.
  • Capitalized Cost – In this case, the purchase price of the car. A capitalized cost is a cost that is part of a fixed asset on a company’s balance sheet, rather than a cost charged to expense in the period incurred.
  • Lease Fee – An amount charged when a car a leased.
  • Pre-Tax Monthly Payment – The monthly payment amount less taxes.
  • Monthly Sales Tax Payment – The monthly amount charged that goes toward sales tax.