Define Car Leasing
Car leasing is one option for acquiring a new vehicle. Drivers may have to weigh the benefits of leasing against those of buying a car with a loan before making a decision about what model to purchase. While leasing has some distinct advantages, it also carries risks that drivers should be aware of.
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Definition
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A car lease is essentially a long-term rental. The buyer agrees to a price on the car and then makes a monthly payment to a leasing agency according to a contract negotiated through the car dealer. At the end of the lease term, the driver must return the vehicle to the dealer or buy the vehicle outright by paying a buyout price, which is set when the buyer agrees to the original lease.
Terms
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While the terms of each lease vary, there are some basic terms that are common to most leasing companies. A lease generally lasts between three and four years, with 36 months as a popular lease term. The driver is also required to stay below a preset mileage limit, which is often 10,000, 12,000 or 15,000 miles per year. Drivers who exceed the preset mileage are required to pay an overage fee when they return the vehicle.
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Advantages
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The most obvious advantage of leasing a car is the ability to have a new car every few years. Since the buyer is only financing the car for, say, three years, he also may pay less per month than he would on an auto loan to buy the car, even if the loan was spread out over more than three years. Because the leasing company is likely to own the car at the end of the lease, they may include the cost of certain routine maintenance in the lease or offer special service prices through the car dealer's service department.
Equity
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One of the major drawbacks of a car lease is that, at the end of the lease, the driver has no equity in the vehicle. Unlike buying a car, which would allow the buyer to sell or trade in the vehicle toward a new model, a leased car must be surrendered or purchased at the end of the contract. Since the buyout price is often significantly higher than the fair-market value of the car, turning the car in and beginning a new lease on another vehicle is sometimes the only choice a driver has.
Other Disadvantages
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Car leases have additional drawbacks that should weigh into a buyer's decision to lease or buy. Different leasing companies impose various fees on vehicles, including a purchase option fee that the driver pays if she chooses to pay the buyout at the end of the lease; other fees may apply to a driver who returns her vehicle with excessive wear and tear or nonmatching tires. Excessive mileage can also be costly, with leasing companies charging drivers by the mile for any mileage over the limit defined in the lease terms.
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References
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