About Leasing
Lease vs. Buy: What's the difference?
Benefits of Leasing

The concept of car leasing is fairly simple, yet many automotive consumers don't understand it and are skeptical, even afraid of it.

As with any business transaction, the keys to successful auto leasing are knowing how the business works and being prepared.

Without at least a basic understanding of leasing concepts, knowing how to get a good deal and knowing how payments are figured; you expose yourself to the very real possibility of making serious mistakes, significantly overpaying or worse, being cheated.

In fact, you shouldn't even consider leasing your next car unless you understand these fundamentals.

About Leasing

As recently as ten years ago, most automobile consumers had never heard of leasing, much less done it. Now, approximately a third of all new cars are leased, and the numbers are increasing every year. Just look at the leasing ads in your local newspaper and on TV to get a notion of how popular leasing has become.

Two key factors have caused the big shift to leasing. First, the cost of new cars has rapidly spiraled upwards in the last few years, often putting prices out of reach for average buyers. Second, tax law changes in the late 1980's eliminated interest deductions on car loans, further increasing the cost of ownership. The net effect was that people were eager to find ways to make car purchases more affordable.

Lease vs. Buy: What's the difference?

With leasing, you only pay the portion of a vehicle's original value that you "use up." Which is the amount by which it depreciates. For example, if you lease a car that costs $20,000 that is worth $13,000 after 24 months, you only pay the $7,000 difference plus interest. When you buy, you pay for the entire car.

This is fundamentally why leasing offers significantly lower monthly payments than buying.

Lease payments are made up of two parts: a depreciation charge and a finance charge. You pay the car's owner (the leasing company) for loss in value of it's asset, as well as interest on the total amount of money they have tied up in the car while you're driving it.

Loan payments also have two parts: a principal charge and a finance charge. The principle charge pays off the vehicle's original full purchase price, while the finance charge is interest. However, since all the vehicles depreciate the same amount regardless of whether they are leased or bought, part of the principle payment should be considered as a depreciation payment, exactly like leasing- it's money you never get back, even if you sell the vehicle in the future.

The remainder of the principle payment goes toward equity, Equity is resale value. It's what remains of your car's original value at the end of the loan after depreciation has taken it's toll. It's the part you get back if you sell the vehicle. The longer you own the vehicle, the less equity you have.

So buying a car with a loan is essentially like putting money into a declining-value savings account- you never get as much as you put in. A terrible investment by any measure.

Leasing, then, is almost like buying but without the "savings account." You only pay for what you use. It's true that you own nothing at the end of the lease, but what you don't own is the same part of the car - the depreciated part - that a buyer too doesn't want at the end of his loan.

With leasing, you at least have the option of putting your monthly payment savings into more productive investments, such as mutual funds or stocks that have the possibility of increasing in value.

Benefits of Leasing

Automobile leasing can be a very attractive alternative to buying for so many people. So, what benefits does leasing provide when compared to conventional purchase loans?

Lower Monthly Payments
Because you're only paying for the portion of the car or truck that you actually use, your monthly payments are 30%-60% lower than for a purchase loan for the same term.

More Car, More Often
Since your monthly payments are lower, you'll be able to get more car for your money and drive a brand new car every two to four years, depending on the length of your leases.

Fewer Maintenance Headaches
Most people like to lease for a term that coincides with the length of the manufacturer's warranty so that if something major goes wrong with the car, it's always covered.

Lower Upfront Cash Outlay
Most leases require little or no down payment, which makes getting into a new car more affordable and frees up your cash for other things. Furthermore, in most states you don't have to pay a big upfront sales tax when you lease.

Lower Tax Bite
In most US states and in Canada, you only pay sales tax on your monthly lease payments, instead of the entire value of the vehicle.

No Used Car Hassles
With leasing, the headaches of selling a used car are eliminated. When your lease ends, you simply turn it back to the leasing company and walk away, unless you decide to buy or trade it.

Early Lease Termination
Lease contracts are purposely written to discourage, even prevent, early termination. To do so usually means you'll pay a termination penalty and all remaining payments. Therefore, if you lease, you should have a stable lifestyle and a good job situation to minimize the possibility of needing to terminate early. Wanting or needing to end a lease early is the most common problem people have with leasing.