Understanding Automobile Leases

Automobile leasing has become very popular as a way to get a new car with little down and lower monthly payments than you would have were you to finance the automobile outright. The biggest difference is that when you buy a car outright and finance it, at the end of the finance term, you own the car free and clear. At the end of a lease term, you don’t. However, the lease can be very advantageous, depending on your circumstances.

The idea behind a lease is that you are paying for the car’s use over a specific period of time, based on its value at the end of the lease term. The difference between the original price (new) and the residual value (how much it’s worth when you turn it in) is the main factor in determining the lease payment. As such, automobiles that will carry the best monthly lease payments are those that hold their value over time.

The original price, which in a lease is called the capitalized cost, can be negotiated, just like the price of a car can be negotiated if you buy it outright. Usually, the capitalized cost tends to be lower than the manufacturer’s suggested retail price. When you lease a car, you can also take advantage of all the same discounts and incentives as if you were buying, and these incentives will reduce the capitalized cost–and therefore will reduce your monthly payments. And as most people know, a car loses most of its value during its first year of use–and as a result, shorter-term leases will carry higher monthly payments than a longer-term lease.

If you have some credit problems, leasing may not be a good option. Even though you may be able to get a lease, your interest rates will be higher.

Leasing vs. Buying
One thing to consider when weighing the advantages of leasing versus buying is what you plan to do at the end of the payment term. If you buy a car with conventional financing, after the finance term, you have an asset; when you are leasing, you do not have that asset. However, you have enjoyed lower payments in the interim, and so this may be of greater value to you. At the end of a lease term, you may choose to keep the car and buy it from the leasing company for its residual value. Overall, when figuring the bottom line numbers, if you plan to keep the vehicle, buying is usually cheaper than leasing. For those who prefer to get new cars every few years, leasing is probably the most economical option.

However, there are a few stipulations that could make your lease costly. If you end your lease before the term, you will have to pay some stiff penalties. Also, your lease will probably restrict the number of miles you can drive your car. If you exceed the mileage limit, you will have to pay an excess mileage fee when the lease term is over, and this can be substantial. Also, the car is always expected to be returned in good condition; if it is in poor shape, you will have to pay extra.

Types of Leases
There are two general types of leases. A closed end, or “walk away” lease, is the most common, and this lets you return the car at the end of the lease term with no further obligation. However, this assumes that you have not put more mileage on the car than was granted in the lease term. An open-end lease is used more often for businesses. This type of lease carries a higher mileage allowance, but the company or individual taking out the lease takes on more of the financial risks involved.

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