Leasing 101: What You Need to Know Before You Sign on the Dotted Line
There are a lot of things to consider about leasing, and there's no one answer-fits-all. It's important for you to take a holistic view of not only your finances, but your habits, preferences, and end goals
What is Leasing, and How Does it Work?
Although it may sound like a convoluted term, the act of leasing a vehicle is a lot like renting. You don't own the car you are driving, but merely covering the cost of its depreciation after it is driven off the lot.
When you go to lease a vehicle, you and the dealer agree to a term limit, which is typically around three years and a mileage limit of 12,000 to 15,000 per year. This allows you to take advantage of the vehicle's manufacturer's warranty in the event of needing repairs.
Also, since vehicles lose value quickly, anything longer than that, and you'll be paying more than it's worth.
Is it Better for Me to Lease or Buy?
There are advantages to leasing that you can't get with buying. The most prominent of these is that your monthly payment is less than it would be if you were buying. So, if you have expensive tastes, but don't want to pay expensive prices, leasing might be the right choice.
The flip side of this is that at some point, you will have to return the vehicle. But if you decide to buy, you could end up having to pay a lot more than had you just bought it from the beginning. Also, constantly leasing vehicles means that you will never reach a point when you won't have to make car payments.
Breaking Down Lease Terms
There's a lot of jargon surrounding the world of leasing, so let's break it down in simple terms.
- Lessee: That's you; the person leasing the vehicle.
- Lessor: That's them; the company leasing you the vehicle.
- Capitalized Cost: The total adjusted amount the vehicle is financed for; negotiated down from its initial value.
- Residual Value: The value of the car at the end of the lease.
- Money Factor: The interest rate you will be paying.
- Acquisition Fee: Additional cost paid at signing; goes directly to leasing company.
- Disposition Fee: A fee that covers cleaning and re-selling expenses at the lease's end if you don't buy the vehicle.
So I've Decided to Lease a Car, Now What?
Awesome! No long-term commitments and lower monthly payments are yours. Now let's break down the finer details.
Maintenance and Repairs
Driving a leased car means that you are driving a new vehicle under a manufacturer's warranty. These warranties are in place to cover defects and minor issues that arise that aren't your fault.
However, things like tire replacements, belts, hoses, and window repairs are your responsibility. It's important to think about repair costs in a way like you are the owner of the car. This keeps drivers accountable and from returning a trashed vehicle at the end of the lease.
Leasing and How It Affects Your Credit
When you lease a vehicle, less debt will appear on your credit report since you are not responsible for the full value of the car, only the value that you are using. What would show on your report would be the residual value of the car as pending.
If you don't keep the car at the end of the lease, the pending value will no longer show on your report, and you'll instead show that you successfully completed a lease. Since leases are typically shorter than financing a car, successive lease completions can boost your credit score quicker than buying a car.
My Lease is Over, What Happens Now?
Returning the car is as easy as you want it to be. If you stayed within the mileage parameters and the car only has typical wear and tear, you can pretty much expect to drop off your keys, sign some paperwork, and be on your way.
Otherwise, you'll find yourself hit with some stiff fees. Excess mileage penalties usually fall in the range of 20 to 30 cents per mile, which doesn't seem like much at first glance, but adds up quickly.
You can also enter a new lease on a newer car. This jump is made simple by you already being savvy to the process, so you can better negotiate your next deal.
Then, there's the option of buying. The good thing about this is that there's no haggling necessary. The residual value of the car is what you owe, period. This can be either good or bad, depending on how the car has depreciated in value during the time that you leased it.