- Car leasing
- Car leasing methods
- Car leasing vs. renting a car
- Car leasing benefits
- Car leasing disadvantages
- Car leasing period
- Leasing and price negotiations
- Car dealers and leasing companies
- Deals without dealers may be more beneficial
- Car leasing process
- Your lease has expired
Car leasing
Car leasing is a way of paying for the use of a car, truck, SUV, or van for a fixed or indefinite period of time. It may be viewed upon as an alternative to vehicle purchase. The major difference in a lease is that after the lease expires, the lessee must return the car to the dealer or buy it.
Car leasing deals with the biggest problem associated with a new car buying a – the fact that the car immediately loses a large portion of its value as soon as you drive it away from the garage. Of course, the more you drive your car the less it is worth but different makes and models have different depreciation rates.
As a result, when you take out a car lease, a sum is worked out known as the ‘residual value’ – this is an estimate of what the car will be worth at the end of your lease period. Your monthly payments are then based on the manufacturer’s suggested retail price or the price you negotiate with the dealer minus the residual value. This means that you pay the difference between what the car is worth when you take out the lease and what it is estimated to be worth at the end of this period.
Car leasing methods
• Paying by cash – An option not available to many, but all interest payments are avoided if you have enough money set aside to buy a vehicle outright. However, even if this is the case you should think hard about whether you can afford to commit so much money into a single purchase, particularly as the value of your investment decreases immediately. Leasing could be a better option if you want to change your car every few years.
• Personal car loans – With a car loan you own the car from day one – however, you will need to repay the original value of the vehicle plus interest. Personal car loans involve an element of risk as if you cannot afford to make repayments, you could lose your car, or even your home if that is what you have secured your loan against. Loan rates vary and each application will have an effect on your credit rating – receiving a poor rate could leaving you paying thousands of pounds extra on a car. Nevertheless, there are a large number of car loan lenders and there are no restrictions on the type of car you drive or the mileage you accumulate. Generally, car loans are best suited to those who know they can afford to repay the loan quickly.
• Hire purchase – This is a similar process to car leasing except that the car is yours at the end of the leasing period. You pay a deposit and monthly installments over an agreed period before the car becomes yours – so in effect you are taking the car with a right to buy. The main factor in finding a good hire purchase agreement is shopping around between online dealers and brokers as interest rates may differ greatly. The advantage of a hire purchase loan is that you are always secured against the vehicle so there is no risk of losing your home, but do look out for additional fees such as an ‘option to purchase’ fee.
• Personal contract purchase – This is a type of car leasing which gives you the option to either pay a final sum to own the car, or return it to the dealer. The car is not yours until the end of the term and it is important to note that there may be mileage restrictions in case you wish to return the vehicle.
Car Leasing vs. renting a car
First of all let’s find out what are the differences between car leasing and renting a car.
Renting a car is typically for a very short period of time, unlike car leasing which is 24, 36, 48 months (unless you take over a short term car lease on a lease transfer). When an individual rents a car, they typically incur a higher cost / fee for the time spent driving the vehicle.
Car rental typically includes unlimited mileage and CDW. Each car day consists of a 24-hour period beginning when the car is picked up. No refund will be made for cars used for less than a 24-hour period. If a hire-rental is returned later than the 24-hour period, additional charges may apply. Car rental does not include local assessments, taxes,liability insurance, drop off charges, gas, collision damage waiver, personal accident insurance or personal effects protection, unless stipulated in the car rental agreement.
Car leasing on the other hand is taking temporary ownership in a vehicle over a period of time, est. 24 to 48 months, where the individual leasing the car and the leasing company agree on a set schedule of monthly payments until the end of the vehicle lease. Leasing a car has a much longer commitment time than renting a car, and typically is less cost per month.
Car leasing has set mileage per year (outlined in the lease agreement) and is the responsibility of the lessor to maintain the vehicle, including repairs (generally covered under a warranty), gas, etc.
Leasing a car can also require the leasor to place a down payment on the vehicle before driving off the dealers lot, and the leasor has the option to buy / purchase the car at the end of the lease term.
And with car leasing, the individual has the option to transfer the car lease through a car lease assumption process to another individual seeking to take over a short term car lease. With renting a car, the individual renting the car cannot.
Car leasing benefits
The benefits associated with car leasing are the following:
• Lower payments – Your monthly payments will be lower with a lease than purchasing options.
• You pay down less – Typically you will only be asked to pay the first three months in advance.
• Broad opportunities – Due to the lower expenses you can often afford cars that were previously out of your reach and pochet.
• Fresh feelings – At the end of the agreement you can simply return the car and take another one.
• Additional benefits – Some car leasing companies may carry special offers and include servicing, maintenance and road tax as part of the leasing agreement.
Car leasing disadvantages
The disadvantages of car leasing may be the following:
• You won’t own the car –If you don’t make repayments your car can be repossessed.
• Other charges may appear as well– When estimating the residual cost of the vehicle to determine your payments, the leasing company will ask you to stick to an annual mileage limit. For most, this won’t be a problem, however, if you do exceed this limit you could face additional charges. Also, you could be charged for any damage to the car if you choose to hand it back at the end of the lease period.
• Car insurance – Remember that as you are effectively driving someone else’s vehicle you must take out a comprehensive car insurance policy.
• Additional charges – Some car leasing companies will charge you interest for the remaining months if you attempt to end your lease early.
Car leasing period
Car leasing period may vary from two to five years and more. However, the three-year lease is usually the best choice for most people. If your lease is for three years you will always be under warranty without paying extra for an extended service contract. Furthermore, a car really begins to show its age at about three years — right at the time the lease is expiring. Remember, one of the reasons for leasing is to drive a new, or nearly new, vehicle on a constant basis. Why would you lease for five years and be forced to deal with extended warranty fees and higher maintenance costs? If paying for these items doesn’t bother you, maybe you should consider buying the car.
Of course, everyone wants a low lease payment, and extending the length of the lease will drop the monthly cost. But by extending the lease you will investing more and more money into a vehicle that will never be yours. It’s better to look for another lease deal and keep the length of the contract to three years.
Leasing and price negotiations
When you lease, you negotiate a purchase price with the dealer just as you would if you were buying. Consumers may usually have usually told you that because it’s a lease, the price is always a full sticker price, however this is simply not true. Normally, the only time you would not need to negotiate price is when the dealer is offering a special advertised deal in which the price and other factors of the lease are already set to attract your business.
Car dealers and leasing companies
The car dealer simply acts as an agent for the leasing company so that you don’t deal directly with the leasing company until you start to make monthly payments. The dealer develops terms of the leasing agreement with you on behalf of the leasing company. For this service, the leasing company usually pays him a commission, which adds to his profit on the deal. Once the contract is signed, you enter a new phase where you deal with the leasing company and not with the dealer, unless it’s an issue with the vehicle itself.
Leasing companies used by dealers are usually daughter companies of car manufacturers ,such as Ford Motor Credit or General Motors Acceptance Corporation (GMAC). However, dealers can also offer leases from banks and other lending institutions with whom they’ve worked out mutually beneficial business terms.
Deals without dealers may be more beneficial
As a leasing consumer, you have the option to shop for your own leasing company, bank, or credit union to find better lease terms than the dealer’s leasing companies can offer you. With the help of these independents you can get an even better price due to fleet purchasing arrangements. The tradeoff is that dealers make it very convenient to arrange for both the vehicle and the lease all in a single meeting, and the dealer’s captive leasing company can often offer special lease terms to help the dealer move vehicles.
Car leasing process
The leasing process includes signing a leasing contract means that you agree to make regular monthly payments, keep appropriate insurance, pay any vehicle taxes and licensing fees, and take good care of the vehicle. Further, you agree that you’ll keep the car for a specified number of months — typically 24, 36, or 48 months — and you’re expected to stick it out to the end.
Your lease has expired
At the end of the lease you’re expected to return your vehicle to the leasing company with no more than normal wear and tear. You’ll have to pay for any damage or extra mileage over and above your contract-specified limits.
You may purchase your vehicle at lease-end for a specified price, if you choose. Or you may be able to use the car as a trade-in on a new car. Otherwise, you can simply return the vehicle to the leasing company and walk away. Be careful, however, because you might just have equity value in your vehicle that you don’t want to simply give back to the leasing company.
Making the best decision about what you do with your vehicle at lease-end — returning it to the leasing company, buying it, trading it, or extending your lease — requires that you look at each option carefully and evaluate the tradeoffs.
