The ins and outs of car leasing

Car leasing is one of the most misunderstood forms of financing in the automotive industry. We will dispel that in this article. For the right person leasing can truly be the best way to drive more car for less money.

Car leasing is basically a long term rental. Typical terms for a lease are 24, 36 and 48 months. So terms are shorter than conventional loans. For those that are saying “I don’t own the car” let me suggest that if you miss a couple of payments on your auto loan you will find out you don’t own that car either, the bank does! For either conventional loans or a lease you don’t own the car until you have clear title.

A lease by design is to allow a consumer to reenter the car market sooner based on the terms offered. You also have NO deprecation in a lease. Here is why:

The math for a car lease is completely different than that of a conventional car loan. You have what is called a residual value or end of term wholesale value. Typically the depreciation for 36 months for example is taken away from the amount of the price of the car and rolled to the end of the lease, so if you take $10K out of your amount to finance then it stands to reason your payment will be less accordingly.

Residuals are set by car manufacturers based on depreciation for a particular model. Often times the manufacturer kicks in a little help so consumers can get a lower payment. As a complete rule-of-thumb a lease payment will be about the same payment as a 72 month loan but for a shorter period of time. It won’t be exact but close.

Lease Example (for illustration only):

$30,000.00 (Selling Price) -$10,000.00 (Residual Value)

$20,000.00 (plus Tax Tag & License) & Bank fees = Payment Principle)

At the end of this term the $10K would be due, the consumer is NOT liable for this in a closed end lease, the car is sent to auction to clear out the final balance. Does not matter what the car brings at auction it’s on the lease company not you! Be sure you are getting a closed end lease. This lease type allows the consumer to turn in the vehicle at the end of the term. Closed end leases are the industry standard.

The advantage is you drive more car for less money, shorter term, and you have no negative equity. You can get into a lease with as-little-as the first payment and roll TT&L into your lease. It’s always a good idea to pay your taxes and not finance them.

Here are some things you do need to understand about a lease. Of course a lease is not for everyone and here is why:

You do have a millage restriction. Typically it’s 12,000 or 15,000 miles per year. If you drive more a lease may not be for you. If you go over the miles it can cost anywhere for $0.20 cents to $0.30 cents per mile depending on the lease company. If you drive less miles you can actually get a higher residual value by 2% and lower your payment.

The car has to be turned in with reasonable wear and tear. For instance the car can’t be turned in with bald tires, cracked windshields, interior or exterior damage that can be fixed either by you or insurance claim. The lease company understands that the seats will have normal wear, carpets will have normal wear and light stains. What they look at is damage that is in excess of normal wear and tear. Check with the leasing dealer for information about lease turn in requirements.

If you’ve found a great vehicle on, it’s worth a look to see what lease options may be available. It’s could save you big money! Keep an open mind when shopping to all the finance opportunities that may be available to you. You can always say no.

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