Automobile leasing may be a viable alternative if you want to drive a new vehicle but avoid the expensive monthly payments that come with automobile ownership. Compared to an auto loan for the same car, leasing a car enables you to drive a new car for a reduced monthly cost. It’s crucial to keep in mind that unless the lease agreement contains a provision allowing you to buy the automobile from the dealer, you won’t actually own the vehicle when the lease expires.
Understanding Car Leasing
With automobile leasing, a common type of auto finance, you can “rent” a car from a dealership for a set time and number of miles. You pay a monthly lease payment in return for the right to use the car. If there is a buyout option in your lease agreement, you can choose to exercise it at the conclusion of the lease term or return the vehicle to the dealer. You typically need good credit to lease a new car. Individuals leasing new cars in the first quarter of 2023 had an average credit score of 736, according to Experian statistics. FICO rates scores of 670 or higher as “good.” Despite the fact that you are leasing an automobile, it is crucial to understand that your lease payment history will appear on your credit reports.
How Do Car Leasing and Car Loans Differ?
Car leasing is similar to an auto loan in many ways. When you lease an automobile, you might have to put down cash and pay monthly installments, just like with a regular auto loan. But there are some clear differences between the two.
Comparing leasing to a car loan, leasing frequently has lower monthly costs. The downside to these smaller payments is that you are essentially paying for the right to drive the car for a set amount of time and miles rather than accumulating equity in it.
While you can obtain a car loan through a bank or other lender, leasing an automobile through a bank is less common. To obtain a lease, you will often deal directly with a dealership or specialized auto finance business.
Unless you have the option to purchase the vehicle, you return the automobile to the dealership at the conclusion of the lease term, which normally lasts between two and four years.
Can You Lease a Used Car?
It is feasible to lease a used automobile; however, it is advised that you work with a franchised dealership to set up financing for a CPO vehicle. These franchised car lots, like those for Toyota or BMW, provide trustworthy possibilities for leasing old vehicles. On the other hand, since these leases frequently have unfavorable terms and conditions, it’s generally a good idea to steer clear of leasing from “lease-here, pay-here” dealerships that primarily serve those with bad credit.
Key Terms to Know Before Leasing a Car
It’s important to become familiar with typical lease-related jargon before signing a car lease. Listed below are some key words to understand:
- Open-end as opposed to closed-end leases: Find out whether your lease is closed-end or open-end. Unless there is substantial wear and tear or mileage overage, a closed-end lease normally involves no more financial obligations when you return the car. If the car’s value turns out to be lower than anticipated, you can be obliged to pay more if the lease is open-ended.
- Capitalized Cost: The total capitalized cost at the beginning of the lease represents the agreed-upon value of the vehicle and any related services. It includes the value of the vehicle as well as any extra services and costs specified in the lease.
- Capitalized Cost Reduction: This is a decrease in the monthly payment and gross capitalized cost due to a down payment or trade-in. The capitalized cost reduction lowers the amount financed, similar to a down payment.
- Residual worth: The expected worth of the vehicle at the conclusion of the lease is known as the residual value. A higher residual value means the vehicle retains its value better.
- Depreciation: The pace at which a vehicle’s value depreciates over time is referred to as depreciation. Depreciation costs are covered by lease payments.
- Rent fee: The rent fee, sometimes referred to as the money factor, is the main expense incurred when leasing a car. It is comparable to an interest in nature. Adding 2,400 to the money factor yields the corresponding annual percentage rate (APR).
- Use Tax: If you lease an automobile, use tax can be applicable. In the majority of states, the use tax takes the place of the sales tax that is generally paid when buying a car.
- Guaranteed Auto Protection (GAP) Coverage: In the event of damage or theft, the GAP insurance will pay the difference between what you owe on the lease and the real worth of the vehicle. This insurance may be required by the lessor.
- Early Termination Fees: The early termination fees described in the lease agreement may apply if you decide to quit your lease before the predetermined period.
What Happens at the End of a Car Lease?
You have two choices when your lease term expires:
- Purchase the Vehicle: Most lease contracts give the customer the choice to purchase the vehicle at the end of the lease. If you don’t have the money to buy the car outright, you can think about requesting a lease buyout loan.
- Return the Car to the Dealership and Close the Account: You can do this to end the lease and return the car to the dealership. However, if you go over the allotted mileage or the car shows signs of excessive wear and tear, you might have to pay more.
Is Leasing Right for You?
Even though monthly lease payments are typically less expensive than loan payments, leasing a car may end up costing more in the long run than buying one. You finally pay off the vehicle and stop making payments when you have a car loan. However, leasing prevents you from accumulating equity in the car.
Depending on your interests and situation, leasing can be a good choice. The following situations are examples of when leasing can be beneficial:
- A desire for new cars: If you prefer driving new cars, leasing enables you to enjoy their advantages without having to go through the inconvenience of trading in your current vehicle every time you wish to upgrade.
- Reluctance to Own a Car: If you find owning a car to be bothersome, leasing offers a workable substitute. Service contracts are frequently included in lease agreements, which streamline maintenance and repair procedures.
- Short-Term Vehicle Need: A two-year lease may be more practical than purchasing and selling a car if you just need a car for a brief time, such as while traveling temporarily.
Final Thoughts
Finally, think about whether leasing will meet your needs when you shop for your next vehicle. Keep in mind that you won’t automatically own the vehicle at the end of a lease. In order to decide if leasing or purchasing a new car is the best option for you, take into account your lifestyle, preferences for ownership, and spending limit. In order to compare the expenses and savings of leasing versus purchasing a car, you may also utilize a lease vs. buy calculator for autos.