Leasing
Auto Leasing Verses Buying Your Vehicle
Auto leasing is the use of a vehicle for a fixed period of time. It is commonly offered by automotive dealers as an alternative to vehicle financing through a bank or financial institution. The fundamental difference in a lease rather than a purchase through financing is that after the lease term expires (usually about 3-5 years) the lessee can return the vehicle to the dealer and roll into another new lease or buy the vehicle at a pre-determined value. The buy-out price to purchase the vehicle at lease end is usually agreed upon when the lease is first signed.
Advantages & Disadvantages
Auto leasing offers advantages to both buyers and sellers. For the buyer, lease payments will usually be lower than payments on a car loan would be, and qualification is usually easier (although this must be measured closely as the recent financial recession has greatly changes how banks are calculating risk and financing). Some consumers may prefer leasing as it allows them to simply return a car and select a new model when the lease term expires, allowing a consumer to drive a new vehicle every few years without the responsibility and hassle of selling the old vehicle. A lessee also does not have to worry about the future value of the vehicle, while a vehicle owner does. Cars are depreciating assets and lose value as soon as you drive off the lot.
Dealer Benefits
For the leasor, car leasing generates income from a vehicle the leasor still owns and will be able to sell or lease again once the original lease has expired. As consumers will typically use a leased vehicle for a shorter period of time than one they buy outright, leasing may generate repeat customers more quickly, which may fit into various aspects of a car dealer’s business model.
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Lease Agreement
Lease agreements typically stipulate an early termination fee and limit the number of miles a lessee can drive (for passenger cars, a common number is anywhere between 10,000 to 15,000 miles per year). If the mileage allowance is exceeded, fees may apply.
Dealers will typically allow a lessee to negotiate a higher mileage allowance, for a higher lease payment. Lease agreements usually specify how much wear on the vehicle is allowable, and the lessee may face a fee (Excessive wear-and-use charge) if that amount of wear has been exceeded.
Excessive Wear-and-Tear
The leasor (car dealer), may charge an amount to the lessor or assignee (third party that buys a lease agreement from a lessor.) to cover wear and tear on a leased vehicle beyond what is considered normal. The charge may cover both interior and exterior damage, such as upholstery stains, body dents and scrapes, and tire wear beyond the limits stated in the lease agreement. Open-end leases typically do not include an excessive wear and use charge.
Excessive Wear-and-Tear Insurance
The lessee (vehicle user), may purchase an optional insurance plan that covers some or all of the charges for excessive wear and tear defined in the lease agreement. The coverage of these plans varies in the amounts and types of charges covered. Most plans
deny coverage if the lease is terminated early or if you are in default. Generally, these plans do not cover excessive mileage.
The actual lease payments are calculated very similarly to the way loan payments are, but instead of an APR (annual percentage rate), the company uses something called the Money Factor. The Money factor (or Lease factor) is a number, often given as a decimal, used by some lessors or assignees to determine the rent charge portion of your monthly payment. This number is not a lease rate and cannot be converted to a lease rate by moving the decimal point.
To find out about financing your vehicle rather than leasing it, click here.
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