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Auto Leasing

Find out why auto leasing can be a sound alternative to owning a car, and how the process works.

Auto leasing terms should be carfully reviewed by the lessee before signing. [©Jupiter Images, 2009]
©Jupiter Images, 2009
Auto leasing terms should be carfully reviewed by the lessee before signing.

Auto Leasing

Many people have misconceptions about auto leasing and think that it is always a bad idea to lease a car. However, for some individuals, auto leasing is a more affordable option than buying the car outright.

The difference between purchasing a car and leasing one is simple. Auto leasing means the consumer doesn't own the car at the end of the leasing term, and either returns the car or purchases it. When leasing, a consumer essentially only purchases a portion of the car's price, with depreciation factored in, according to LeaseGuide.com.

How Auto Leasing Works

Before an automobile is leased, the consumer and dealer must agree on a purchase price. Then the dealer sells the car to the leasing company for that price. According to Automotive.com, a common misconception about auto leasing is that consumers lease cars from dealers, when they in fact lease them from a different company.

The leasing company enters into a lease agreement with the consumer for the agreed-upon purchase price. Thus, the original price of the car makes a big difference when determining monthly payments. Many people don't realize that they can negotiate the car lease price just as they might when purchasing a car. In fact, Automotive.com recommends that consumers negotiate the price of a car before the dealer even knows the consumer is considering a lease. Edmunds, Inc. notes that the advertised manufacturer price is usually higher than a person may end up paying.

The ultimate cost of leasing is more complicated, however. The consumer is often asked to pay upfront costs, including a security deposit, taxes, registration and a capitalized cost reduction. The consumer then agrees to make regular payments, carry insurance, maintain the vehicle and adhere to mileage limits. The monthly rate the consumer pays is similar to the interest payment on a loan, and is called the "money factor."

The dealer's role is to serve as the negotiator between the consumer and the leasing company, and the dealer receives a commission for this that is added onto the price. However, the agreement is really between the consumer and leasing company. Car manufacturing subsidiaries often serve as leasing companies, but leasing agreements are also offered by banks and credit unions.

What many consumers also don't realize is that they can shop around for better leasing terms. Flexible consumers who are open to changing the make, model or color of the car can find better deals. For cars that are widely available, its possible to call around and solicit bids from multiple dealerships.

Auto Leasing Terms

LeaseGuide.com explains that auto-leasing deals are calculated this way: suppose a consumer leases a $20,000 car for 24 months. The car depreciates (goes down in value) $7,000 in that time. That amount is used to calculate the monthly payments, along with financing charges and fees. According to Automotive.com, the monthly auto leasing payment is also determined by the interest rate, length of the lease and capitalized cost. When purchasing the same car, the consumer would pay the full $20,000, plus financing charges and feesand the consumer still has to deal with car depreciation.

Car leases usually last at least 24 months but can also be for longer lengths, such as 36 or 48 months. Edmunds, Inc. states that three-year leases are the most common and work well for many consumers because they often come with three-year warranties as well. Swapping cars or terminating the lease before the term is over is very difficult.

Mileage limits are often between 12,000 and 15,000 miles per year. For a higher cost, consumers can sometimes increase mileage limits.

There are two main types of auto leases:

  • Closed-end auto leases. At the end of the lease, the consumer typically walks away from the car and returns it to the leasing company.
  • Open-end auto leases. The cars market value is not determined until the end of the lease. This option is recommended only for commercial businesses.

Bankrate.com offers an online auto-leasing calculator, as does Edmunds.com, which also recommends figuring out the potential lease payment before walking into the dealership.

The End of the Lease

At the end of the lease, the consumer returns the car to the leasing agency. The consumer must pay extra for more than normal wear-and-tear and for mileage that exceeds the agreed-upon limits. Some consumers trade in the car for another. Others drop it off and walk away or opt to purchase the car.

Auto Leasing Pros and Cons

There are some disadvantages to auto leasing. Consumers who lease are never debt-free when it comes to their car, as they might be if they paid off a purchased vehicle and could still drive it. Since the consumer doesn't own anything at the end of a lease, the car can't be considered an investment. Furthermore, due to mileage limits, leasing usually does not work for people who must commute long distances.

Often, insurance payments don't cover the remaining portion of a lease in the event of an auto theft or a serious accident, unless consumers have purchased gap insurance. Leases can also result in higher monthly insurance rates.

Still, auto leasing offers some advantages over purchasing a car. They include:

  • Fewer repairs because consumers always drive a newer vehicle.
  • Lower monthly payments. According to Automotive.com, the car lease can be as much as 60 percent lower than the monthly payments to purchase the same vehicle.
  • Leases often do not require down payments. Sometimes they do require a deposit of the first months payment, however. Edmunds.com recommends avoiding auto leases that require down payments because they are often not the best deals.

Leasing Scams

Consumers should be on the lookout for various scams associated with leasing, including:

  • Dealers may leave the trade-in value or rebate off the contract or cancel it out by adding in another random fee. Consumers should double-check the contract details.
  • The math on the contract may be incorrectly calculated. Consumers should do all mathematical calculations, such as taxes, down payments and rebates. They should not sign the contract until doing so.

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