Car leasing was designed to make cars more affordable to consumers. As prices on cars have risen, the ability for consumers to afford a loan has decreased. Car leasing allows companies to reduce the monthly payments on a car by only requiring the buyer to pay for the cost of the car during the time they are using it. It’s very similar to renting – you don’t own anything, you are just paying for the right to use something. Unlike buying, you never actually own the vehicle and you have to return it to the leasing company at the end of the lease period. However, if you choose to own the vehicle you should pay the specified residual value at the end of the contract. The idea of leasing first became popular in the 1990′s when cars became too expensive to buy for many people. Leasing allows a person to drive a brand new car and make lower monthly payments, thus making the “new car experience” more accessible to more people.
(b) From whom do I lease?
When you write a lease, you are typically entering into an agreement with a leasing company or a bank that has a leasing program.
(c) Which Terms Do I need to be Familiar With?
There are 4 terms that you must be familiar with in order to understand how a lease works:
Capitalized Cost (“Cap Cost”): The capitalized cost is the purchase price of the vehicle. This will sometimes be referred to as “Cap Cost”.
Residual Value: The value of your car at the end of your lease is called the Residual Value. When creating your lease, the leasing company predicts how much the car will be worth at the end of your lease. The higher the projected residual at the end of your lease, the lower your monthly payment.
Interest Rate: Most people are familiar with an interest rate which is represented as a percentage (like 6.5% interest).
Term: The Term of the lease determines how long you will lease the car for. Typically you will hear of 36, 48, and 60-month term agreements. However lease Terms can run for as few as 12 months and as long as 84 months! There are even mid-year terms such as 39-month or 42-month terms. Customers have all kinds of reasons for choosing a short or long-term lease. Short-term lease customers typically want to change vehicles often and are willing to pay a slightly higher payment to have this option. Long-term lease customers are often willing to sign up for a long-term liability in exchange for a slightly lower lease payment.