How Do Car Leases Work?
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Why Lease
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The term "lease" means that someone is being granted the temporary possession of something for a specific amount of time. So basically, when you opt to lease a vehicle versus buying one---that is exactly what you are doing---you are borrowing the vehicle for the period of time that you need it. The most common vehicle lease is for a two- to three-year time frame. In some cases, the manufacturer is is even responsible for repair and maintenance. However, car insurance is your responsibility. Also, you are able to get a new car every few years. So if owning a car is of little interest to you, a vehicle lease may be your most viable option.
How It Works
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When you find the vehicle you want to lease, the dealership will sell the car to a leasing agency. You will be making your payments to the leasing agent--not the dealership. The dealership receives a commission, which is its incentive for providing the leasing agency with your business.
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Determining Your Payments
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The depreciation of a vehicle will not slow just because you chose to lease the car versus buying it. The vehicle will age at the same rate. In fact, it will be worth 20 percent less the second it leaves the dealership, but because you are leasing, that's not your concern. However, the depreciation is a factor when determining your monthly payments. Reason being, you will pay the leasing company the proposed depreciation value. For example, if you lease a vehicle that costs $50,000, and the leasing agency expects the car to be worth $30,000 at the end of your lease agreement; you will be responsible for paying the $20,000 difference. After that is determined, your finance charge is added, (which is based on your FICO score and credit history), resulting in your monthly payment. (See Resources.)
Vehicle Lease Becoming Extinct
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When the economic climate is bad, residual values on vehicles will decline as well as sales. In an effort to recover, some dealerships will opt to suspend the leasing option until the economy weathers the storm. However, when dealerships find themselves with a bloated inventory, they are forced to cut prices. So even though you may believe the short-term commitment of a vehicle lease is the better option, it may make more financial sense to buy the car. (See Resources.)
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