Leasing a Car

Leasing a car is paying for the use of a new car rather than purchasing it. The lessee pays for the right to drive a car for a certain period of time, usually three years, but does not own the vehicle or gain equity in it.

Leasing provides the opportunity for a person to drive a new car for lower monthly payments than those of a loan to purchase the same car. It also frees the driver from many of the burdens of car ownership, such as car maintenance. Lessees drive the car for the lease term and then turn in the vehicle without the need to resell or trade in a car before obtaining a new car. Leasing lacks the flexibility, however, that comes with purchasing a car. It includes restrictions on the annual mileage allowed, hefty cancellation fees, and charges for damage beyond reasonable wear and tear.

Background

Car leases may be either closed-end or open-end leases. A closed-end lease is one in which the lessee pays to use the vehicle during the lease and when the lease expires, the lessee has no further obligations. An open-end lease is one in which the lessee must purchase the car for a prearranged amount when the lease expires.

In many ways, leasing a car is like taking out a loan for a new car, with the exception that instead of paying for the value of a car, the lessee pays only for the value of a car during the period when it is used. The cost to lease a car is based on the difference between the purchase price of a new car and its residual value, or its predetermined value at the end of the lease. Finance charges and other fees are added in to determine the monthly payment amount.

In general, no down payment is required. At the onset of the lease, the lessee is usually required to pay the first month’s payment, a security deposit, and registration and other fees. The lease term is usually three years, to coincide with the car’s bumper-to-bumper warranty. If the lease is cancelled before the term expires, the lessee is charged an early-termination fee.

In exchange for the lease payments, the lessee has the right to drive the car with certain restrictions. Mileage restrictions typically are twelve thousand to fifteen thousand miles a year. The lessee pays for any miles over the annual allotment at a rate of twenty cents a mile or more at the end of the lease. Lessees may be able to negotiate higher mileage allotment, which increases the amount of the monthly payments. Other restrictions include the inability to make modifications to the car, such as installing a sound system or tinting the windows.

Overview

A main benefit of leasing is that it typically requires a lower initial cash outlay than buying a new car. Most leases do not require a down payment, so individuals with limited cash flow can obtain a brand new car for less upfront cash expenditure than purchasing a new car.

Being able to drive a new car, with all the latest technology and safety features, is another attraction. In many cases, leasing allows individuals to drive a luxury vehicle that they otherwise would be unable to afford. Leasing meets the needs of individuals who prefer driving a new car every few years or desire the image portrayed by a high-end car. Leasing also frees drivers from many of the hassles of car ownership, such as paying for routine maintenance.

In the long run, though, leasing is more expensive than purchasing a new car. A car buyer gains equity in the vehicle, while a lessee does not. Estimations of the total cost to lease a car and to finance a loan to purchase a new car show both may be around the same amount, but the car purchaser has the advantage of owning the car after the loan is paid off and driving it with no monthly payments. In contrast, the individual who leases a car must continue to lease a car in order to have the use of a car. While a car owner with a five-year loan will be free of monthly payments after five years and can drive the car for several more years without incurring additional car payments, the lessee will continue to make leasing payments every month. When the lease expires, the lessee will have no car and will need to either lease another car or purchase one.

Leasing a car also incurs higher costs to insure the vehicle. In some states, leasing results in lower costs for state taxes because only the portion of the car’s value used is taxed. This benefit typically is offset by the higher motor vehicle insurance costs.

Leasing a car also limits the driver’s flexibility. Lessees cannot modify a vehicle by installing a music system, detailing, or different tires. A lessee needs to limit the mileage or pay fees for every mile driven over the amount allowed. This typically runs at least twenty cents a mile. The lessee also is charged for any damage beyond reasonable wear and tear. Dealers differ in their terms defining wear and tear, so a lessee could be financially responsible for nicks and dings to the car’s body. Lessees also are tied into a contract. If their situation changes and leasing is no longer desired, they will be charged a significant fee to break the lease. In some cases, they may be able to sublease. In addition, if a lessee pays a down payment to lessen the monthly payments and the vehicle then is damaged, the lessee is unlikely to be reimbursed for that down payment.

Impact

Leasing often proves advantageous for businesses that can claim the lease as a tax exemption or who want their employees to drive vehicles that present the company’s image to customers or the public at large. It also meets the needs of car drivers who place a greater priority on driving a new car than on cost.

Leasing gives consumers the opportunity to drive a new car every three years and to drive high-end cars that may be beyond their means to purchase. Purchasing a new car is more likely to meet the needs of individuals who want the least expensive way to obtain a new car and are less concerned about driving the latest car models.

Bibliography

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