How A Car Lease Works

If you do not know how a car lease works, it basically means that when you lease a vehicle, you will be paying to use the car for a certain pre-established period of time. When you lease a vehicle from a dealership, the latter essentially sells the automobile to a leasing agency. The car dealership is rewarded with a commission for offering a new customer to the leasing company.

The moment you get the leased car, you will start making payments every month. These payments are calculated by estimating the amount of depreciation the car will suffer during the period that you will have it. For example, if you lease a $20,000 car and the leasing company estimates that the vehicle will be worth $11,000 after the lease is over, your monthly payments will be directed at paying that $9,000 difference, simple as that.

If you were to buy the car upfront for $20,000, the very moment you drive it off the car lot it is worth about 10-15% less. The rate of a car’s depreciation is the same, regardless if you buy or lease. For this reason, if you don’t really care about owning the car, leasing is probably the most affordable way to drive a car. You can also assume a car lease, which is probably the cheapest way to drive a relatively new car.

When figuring out the monthly payments, you also have to take into consideration the finance charge, which is in fact a varying percentage that is based mostly on your credit score. There are also other smaller charges that we should mention, like tax and licensing fees. There is a possibility that you will be obliged to pay more money if you go over the allotted amount of miles (usually 10,000, 12,000 or 15,000 miles / year), like 15 cents for each extra mile. You can negotiate the yearly mileage when you sign the deal, but it will cost you extra. If the car that you want to buy is advertised at 10,000 miles annually, but you want to drive if for 15,000 miles / year, the company will raise the interest rate on your lease – this is called “money factor”.

In understanding how a car lease works, you also have to take into consideration the fact that you will be responsible for maintaining the leased vehicle and performing regular oil changes. After the lease is over, you will return the car and the dealer will inspect it. If they find anything wrong with it, outside of the regular wear and tear, you will be assessed a penalty. Each scratch and/or dent will be measured, and the penalty that you will have to pay will depend upon the size of the dent and/or scratch. In addition, if the car’s tires are worn out, they will charge you a fee for each worn tire.

When the agreement is over, you will have the possibility to buy the car. The purchase price is in most cases the subsequent value of the car after the depreciation. You also have the alternative of leasing the car again, which will again entail estimating the depreciated value at the end of the leasing term.

Source: SavingAdvice | Photo: CarBuyingTips

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