Automobile Lease Agreements
Buying a car is a major purchase and can cause sleepless nights for many people. To reduce the anxiety, many people choose to lease a car instead of buying it outright. Before leasing a vehicle, it is important to analyze your needs and understand the various types of lease agreements that are offered.
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Leasing Definition
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Leasing could be a good option. Car leasing is an alternative to purchasing the vehicle. Leasing allows you to use the vehicle for a specified period of time. Leasing a car is similar to renting it--except that a rental can last for as little as a day, while a lease has a minimum one-year contract attached to it. You must return the car to the leasing company when your lease is up or you must purchase the car. There are typically two types of lease agreements available, according to the American Bar Association.
Closed-End Lease
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The leasing company takes a risk in a closed-end lease. A closed-end lease is also known as a "walk away" lease. In a closed-end lease, you return the car at the end of the term and walk away with no further obligation. Unless there is major wear and tear on the vehicle, the car's value when you return it does not matter. A closed-end lease usually entails higher monthly payments because the leasing company is assuming the risk of the future worth of the vehicle.
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Open-End Lease
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Keep it clean. In an open-end lease, you assume the risk of the future worth, or "estimated residual value" of the car. At the beginning of the lease term, the leasing company sets the estimated residual value of the car, basically what the car should be worth at the end of the lease term. If the appraised value of the car at the end of the term is equal to or above the estimated residual value, you owe nothing. If below the estimated residual value, you must pay the difference. Open-end leases have lower monthly payments but are more of a gamble for the consumer.
Car Leasing Advantages
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Advantage Consumer Even though you may have to pay a security deposit and/or lease fee upfront, there are still advantages to leasing a car. You will have lower monthly payments and may avoid down payments and sales tax altogether. If you lease for business purposes, there may be tax advantages.
Car Leasing Disadvantages
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Disadvantages to leasing a car are the lease has no cash value and there is no equity built up in the car. Also, at the end of the term, you no longer have a vehicle.
Considerations
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Your contract may have an early termination clause which will make it difficult to break the lease. Early termination clauses usually require a minimum number of monthly lease payments to be made before you cancel, and you will have to pay a penalty fee.
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