Leasing isn't for everyone, but it is an excellent option for those who change vehicles every two or three years, or want to drive a luxury model that might otherwise be out of budget.
While lease payments are usually lower than loan payments, leasing is more expensive in the long run. A monthly payment covers two things: principal and interest. A loan payment is higher because the entire cost of the car is paid off plus interest over the term of the loan.
A lease payment, on the other hand, pays off the difference in the car's value from the beginning to the end of the lease. The amount of that difference is financed at interest and is represented as a fractional number called the "money factor."
Unlike a traditional loan, the consumer is not paying for the vehicle itself, but only for the use of the vehicle. At the end of the term, the car is handed back to the dealer along with any equity it may have accrued.
To lease a car, a consumer will usually make a down payment, a first month's payment, and an acquisition fee. A security deposit may be required, as well.
During the term of the lease, the consumer may be required to have the car serviced at the dealership and only be allowed a certain number of miles per year before a surcharge kicks in. A typical mileage allowance is 10,000 miles per year, with a charge of $0.20 being added for every mile over that.
At the end of the lease, the car is handed back to the dealer and a disposition fee is charged. While normal wear and tear is expected, consumable items such as tires, brakes, and wipers may have to be replaced at the leasing company's discretion and the consumer's expense. The final charge can be hundreds or even thousands of dollars.
At this time, the consumer has the option of purchasing the vehicle at a price specified in the initial contract.
While all this might sound a bit off-putting, leasing has distinct advantage for those willing to pay for it. A new car every two or three years means low maintenance and few breakdowns. A new car has the latest in safety and comfort technology. At the end of the term, the vehicle simply disappears and any old car worries with it.
It's important to read the lease contract carefully, and to make sure all the terms are clearly outlined. There are costs associated with leasing, but the benefits are many. For those who love driving the latest model, a lease may be the way to go.
