All About Leasing
Is Leasing a Better Way to Finance Your Next Car?
A Loan Vs. Lease Comparison
Leasing Frequently Asked Questions
Should you lease or buy your next car?
The answer is different for almost anyone who asks themselves that question. There are some guidelines to use in order to help you through but ultimately, no one else can tell you what’s best.
Ask yourself the following questions:
- How long will I own this vehicle?
- How many miles will I drive per year?
- Do I like to maintain my car in good working order?
- Will I use the vehicle in my business? {Not including commuting to and from work.}
- Do I prefer to have the newest models and always under a factory warranty?
- Would I like to avoid the big maintenance and repair costs that occur after the factory warranty runs out?
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Is Leasing Right For You?
Generally, if you own a car less than four years, like to keep a warranty and drive less than 15,000 miles per year, leasing can be a great alternative to buying. When you lease a car, you simply pay for it’s use, the difference between what it is worth new and what it is worth after you are through with it. You will also pay interest and taxes on the vehicle as well. Your payments are almost always lower than with conventional financing of the same term and can even be the same or lower on a 36-month lease than on a 60-month straight finance, for example. For many people, leasing is a great way to be able to afford more car or keep a newer car than their budget would allow on a straight purchase. There can also be some tax savings and easier deductibility if you use the vehicle in a business, but you need to check with your tax advisor to make sure you qualify.
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When Is Leasing Not Right for You?
If you drive a car until the wheels fall off, or if you drive a huge number of miles per year, {over 18,000}, leasing may not be right for you. The cheapest way to own a car is to pay cash for a slightly used one, but that is seldom the best use for your money. Putting a lot of money in a car is like putting a pile of cash on your driveway and watching the wind blow it away. Every day you own it and every mile you drive it, it is worth less than the day before. However if you hate making payments this may be your best alternative. But remember, you’ll probably still make payments, as you rebuild your savings since all your cash is tied up in your car.
Some people have a conceptual problem with leasing. They say, “But I don’t own anything.” If you purchase a vehicle and finance it through a bank, and trade it in before or just after the loan is paid off, you don’t own anything either, the bank does. But your payments are much higher, because you’re paying extra money to build equity. While it’s true that you don’t have any equity in a lease, you are also not paying for that equity and have had complete use of those funds during the term of the payments. An old saying in wealthy circles is to, “buy what appreciates in value, use someone else’s money for what depreciates in value.” Your home, an education, and stocks can all be worth much more in the future than they are now, invest your money there. A car will almost always be worth less tomorrow than it is today, so spend as little of your cash there as you possibly can, and leasing is a way to do that.
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Common Leasing Terms
| Acquisition Fee |
A fee charged by a lessor to cover the administrative costs of preparing, approving and administrating the lease. May be paid up front or included in the gross capitalized cost.
The amount capitalized at the beginning of the lease, after adding any fees or other charges to be included, and subtracting any capitalized cost reductions, such as rebates, trade-in allowances and cash reductions.
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| Capitalized Cost |
Often used to refer to the negotiated selling price of a vehicle to be leased. May be used to refer to the gross capitalized cost or the adjusted capitalized cost.The total of any cash payment, trade-in allowance or rebate used to reduce the gross capitalized cost. The capitalized cost reduction is subtracted from the gross capitalized cost to get the adjusted capitalized cost. |
| Captive Finance Company |
A leasing or finance company that is owned by or otherwise associated with a particular vehicle manufacturer or distributor. |
| Closed-end Lease |
A lease that allows the lessee to return the vehicle at the end of the lease term with no further financial obligation, assuming that the lessee has complied with all of the terms of the lease. The lessee may be responsible for a disposition fee, if it is part of the lease agreement. There may be additional charges according to the terms of the lease for any excess mileage or excess wear. The lessee is not responsible for any difference between the residual value, as stated in the lease, and the actual value of the vehicle at the end of the lease. |
| Depreciation |
The amount the vehicle declines in value over the term of the lease. The depreciation may be calculated by subtracting the residual value from the adjusted capitalized cost. Using this method, the depreciation amount will also include any amounts that were added by agreement to the price of the vehicle to arrive at the gross capitalized cost. |
| Disposition Fee |
The fee charged by the lessor if the lessee does not purchase the vehicle at lease-end, for costs associated with preparing the vehicle for resale and selling the vehicle. The disposition fee must be disclosed in the lease agreement. |
| Early Termination |
Ending a lease before the scheduled termination date. The lessee will typically be required to pay an early termination charge as described in the lease agreement. |
| Early Termination Charge |
The fee charged to a lessee in the event of an early termination of a lease. Penalties vary from lease to lease and the method of calculation is determined at lease inception and explained in the lease agreement. |
| Early Termination Payoff |
The total amount the lessee owes if the lease is terminated early, before subtracting any credit for the value of the vehicle. The payoff is calculated as described in the lease agreement. |
| Excess Mileage Charge |
The fee charged for each mile in excess of the predetermined mileage limit, as set forth in the lease agreement. The excess mileage charge varies depending on the type of vehicle, and is typically between $0.10 and $0.25 per mile. |
| Excessive Wear and Tear Charge |
A charge collected by the lessor at the end of the lease for damage to the vehicle that is beyond what is allowed by the terms of the lease. In a consumer lease, excess wear and tear or normal wear and tear will be specifically defined. |
| Gap Coverage |
A type of insurance coverage that covers the difference between the payoff of the lease and the amount covered by other insurance coverage, when a vehicle is damaged or stolen during the term of the lease. Most gap coverage requires that the lessee not be in default under the terms of the lease. |
| Gross Capitalized Cost |
The negotiated price of the vehicle, plus any other amounts you agree to include in the capitalized cost, such as fees, insurance premiums, service contract premiums or prior vehicle loan or lease payoff. |
| Lease Term |
The period of time covered by the lease agreement. |
| Lessee |
The party entitled to possession and use of the vehicle according to the terms of the lease. |
| Lessor |
The legal owner of the property that is leased. |
| Mileage Allowance or Mileage Limit |
The total amount of mileage the vehicle may be driven over the term of the lease, without incurring liability for additional mileage charges. |
| Money Factor |
A number often used by lessors to calculate the average monthly rent charge portion of the lease payment. |
| MSRP |
The manufacturer's suggested retail price. |
| Open-end Lease |
A type of lease in which the lessee is responsible for the difference between the residual value and the realized value at the end of the lease. The lessee may be entitled to a refund if the realized value is greater than the residual balance. |
| Purchase Option |
The lessee's right to purchase the leased vehicle, either at the end of the lease or during the lease term, as specified in the lease agreement. The lease agreement may or may not include a purchase option. |
| Purchase Option Fee |
A fee in addition to the purchase price that is required to exercise a purchase option, according to the terms of the lease. |
| Realized Value |
A value assigned to the vehicle at lease termination. Check your lease agreement for a definition that may range from the value actually received by the lessor, the highest offer received by the lessor, the vehicle's "fair market value," the wholesale value or the retail value. |
| Rent or Rent Charge |
The portion of the monthly lease payment that is in addition to the depreciation and amortized amounts. |
| Residual Value |
The lease-end value of the vehicle, established at the beginning of the lease. This value is used in determining the monthly lease payment. The residual value is also used to determine the depreciation and other amortized amounts that go into determining the monthly lease payment. |
| Security Deposit |
A refundable deposit, usually equal to one monthly payment, collected by the lessor at the beginning of the lease to offset any amounts due under the term of the lease. |
| Subvented Lease |
A lease that is subsidized by the manufacturer or other lessor. Many subvented leases offer lower monthly payments by utilizing a higher residual value than other lessors, or by offering a lower rent portion of the monthly payment. |
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A Loan Vs. Lease Comparison
Contract Term
| Loan |
Lease |
| Loan contracts are usually signed for 4 to 6 years.
The higher monthly payments usually make driving a new or expensive vehicle every 2 to 4 years unpractical.
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Lease terms are usually between 2 to 4 years.
The shorter term and lower monthly payment of a lease agreement allow you to drive a new and more expensive vehicle every 2 to 4 years.
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Monthly Costs
| Loan |
Lease |
| Monthly loan payments are based on the total amount of purchase price, plus interest charges, taxes and other fees. They are usually higher than monthly lease payments.
The insurance premium is usually lower.
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Monthly payments are calculated based on the vehicle's depreciation during the lease term, rent charges, taxes, and other fees. They are usually lower than monthly loan payments.
The insurance premium is usually higher.
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Limitations
| Loan |
Lease |
| The vehicle is yours. Drive it as you please. However, the higher the mileage, the lower the resale or trade-in value of your vehicle.
Like mileage, there is no limit on the wear of the vehicle. Again, the higher the wear, the lower the resale or trade-in value of your vehicle.
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Most leases impose a limit on the number of miles you may drive. You can negotiate a higher limit with the lessor. However, bear in mind that it might increase the lease amount, and consequently the monthly payment. There will most likely be extra charges if the actual mileage exceed the limit set on the contract when you return the vehicle.
Like mileage, most leases limit the wear of the vehicle during the lease term. You might need to pay extra charges when you return the vehicle, if the lessor determines that the wear is over the limit set by the contract.
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Ownership
| Loan |
Lease |
You and the bank own the vehicle. There are restrictions of where you can take it and the bank holds the title until the vehicle is completely paid for.
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You don't own the vehicle. Unless you decide to purchase it, you must return it at the end of the lease
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Initial Costs
| Loan |
Lease |
Up-front costs usually include down payment, taxes, registration fees, and other minor charges. This amount is usually larger when compared to lease, especially if you want an expensive vehicle with low to moderate monthly payment.
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Up-front costs usually include first month's payment, a security deposit, a down payment, taxes, and registration fees among others. However, if you take into consideration the total cost of the vehicle and the monthly payment that you want, the sum is usually less than the up-front costs of purchasing.
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Termination
| Loan |
Lease |
| You are responsible for paying off the loan.
At the end of the loan term, you keep the car. What you do with the vehicle then is entirely up to you.
If you decide to sell or trade in the vehicle at the end of the loan terms, the risk of its future value is yours.
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You are responsible for any early termination charges stipulated on the lease contract. Make sure that you understand them.
You need to return the vehicle at the end of the lease terms. There might be some end-of-lease charges.
The lessor bears the risk of the future market value of the vehicle.
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Maintenance
| Loan |
Lease |
| You are responsible for the maintenance of the vehicle. |
You are responsible for the maintenance of the vehicle during the lease term. |
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Leasing FAQ’s
How, specifically does a lease work?
When you lease a car, you simply pay for it’s use, the difference between what it is worth new and what it is worth after you are through with it. You will also pay interest and taxes on the vehicle as well. Your payments are almost always lower than with conventional financing of the same term and can even be the same or lower on a 36-month lease than on a 60-month straight finance, for example. For many people, leasing is a great way to be able to afford a more expensive car or keep a newer car that is always under warranty.
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What happens if I want to trade early?
Because none of your payment has gone towards building equity in your vehicle, you will usually owe more than the vehicle is worth until shortly before the end of the lease. A vehicle depreciates the most it’s first year and then levels out. Here’s is a chart to show you how this works.
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What fees are involved in a lease?
Most lease companies have an Acquisition Fee, which is sometimes negotiable. There is also a Security Deposit, which is sometimes a fixed amount but is more often the amount of the first month’s payment, rounded off to the next higher $25 dollar increment. There are Early Termination Fees and Disposal Fees that apply at the end of the lease, depending on if you trade it early or keep it to the end of the term. Again, sometimes these fees are negotiable, especially if you lease another car through the same company.
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What does “normal wear and tear” mean?
The Lease company doesn’t expect the vehicle to be new but any excessive wear should be repaired before you give it back or you will have those repairs charged to you. Some examples will include, but not be limited to the following; a couple chips in the windshield may be acceptable, cracks are not. Any body damage above the level of a door ding should be repaired by a body shop. Seats and carpets may be soiled but should not be stained or torn. All original equipment needs to be present and in goodworking order.
These charges only apply if you drive the vehicle to the end of the term and give it back to the lease company; if you buy it, sell it or trade it in early, you’ll have no charges.
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Can I add anything to my car, like accessories?
If you plan on upgrading your vehicle, you should do it before you lease it. If the upgrade is a “Hard Add” {something that is a permanent change and will add value to the vehicle, like a sound system or nicer wheels}, then it can be residualized and will actually be cheaper to you in the long run. If you add anything that is a “Soft Add” {like a bed liner or pinstripes} that doesn’t add value to the car you will lose it at the lease end but you will not have had to pay cash for it, since it was part of your payments. If you add anything after the lease starts, and you decide to turn the car back to the leasing company at the end of the lease, you will have to restore the vehicle to the exact condition it was in when you leased it or lose the upgrades.
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Why is insurance more expensive when I lease?
When you lease you are listed as the “Lessor” not the owner. The Leasing company is the owner. This is both good and bad news for you. If there is a major lawsuit, the lawyers will often go after the deepest pockets, the leasing company. Because of this however, the leasing company requires a higher level of coverage and a lower deductible, so your premiums can be higher.
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What is a “subvented” lease?
Manufacturers will sometimes use leases to encourage more users of their products, instead of or in addition to rebates or cut rate financing. When a lease is subvented that means that it has an above market residual value or a below market lease factor, {the equivalent of an interest rate}. If a vehicle that you are considering has a subvented lease, it can save you hundreds. Possibly thousands of dollars so be sure to ask your dealer.
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