Car Leasing 101 - What is Auto Leasing?

What is Car Leasing?

Car leasing (auto leasing) is essentially a way of obtaining a vehicle for a set period of time. Leasing is not renting and renting is not leasing, nor is it financing. There is a big difference between leasing a car, renting a car and financing a car. Who should lease a car? It's not for everyone, it's up to you, the consumer to weigh the options and see which vehicle financing option suites your needs and lifestyle best.

Leasing a Vehicle

It's not difficult to understand how car leasing works, though we'll get into that shortly. All you need to remember at this point is that car leasing is simply a means to pay for your vehicle, whether it’s a Ford truck, Acura Legend, Honda Civic, Jeep, Harley Davidson or Kawasaki motorcycle, etc. It’s also commonly known as “purchase-repurchase” or “buyback”. You get a new or used vehicle for X number of months/years and your return it when your car lease agreement is done. It’s a great deal for you and the dealership. You get to “borrow” the vehicle for a monthly cost and upon return; the car dealer can sell the vehicle for slightly used.

Leasing is an option that lets you pay for the portion of a vehicle you expect to use over a specified term, plus a rent charge, taxes and fees.

Car Leasing: Renting and Financing

Renting a Car

Renting a car is just what you'd expect: You pay by the day or week, with or without mileage fees, as you'd do at home. Generally this is a very short time period where you would pay higher fees for the vehicle.

Financing a Car

Financing is designed for those want to achieve ownership of an automobile. Yes – true, you can achieve ownership from leasing a car through buying out the remainder of the vehicle lease to own the car or truck (or take over a car lease from someone else) but the focus here is the goal you initially intend to do with the vehicle. If you first intend to purchase the vehicle, then financing probably the best means to go as it would be the lesser cost of the two.

Car Leasing Common Questions

Can I Get Out of a Lease Before the Agreement is Expired?

Riding out your auto lease till the end of the agreement is not always the final option. Many people find they can lease a vehicle today, but month’s later personal obligations pop up, which results in you not being able to afford the full lease period. For example, you decide you want to purchase a home, a new born enters the family, relationships split up, going back to school, etc. Anything can happen between the time you sign the lease agreement and the time it expires. So a great alternative is finding someone else to swap or break or bust or take over your lease agreement, otherwise you may end up paying an extremely large penalty for defaulting on your lease. This is known as car lease assumption on a short-term basis, an alternative you may want to consider rather than getting into a new lease. We’ll tell you more about breaking or swapping a lease with anther consumer later in this guide.

Vehicle Lease Pricing

Anytime you opt to lease a vehicle from a dealership, ALWAYS remember you have the option to negotiation the price. It’s the same as if you were buying the vehicle; you have the option to negotiate.

Some dealers may state because the vehicle is a lease that they cannot come down on the sticker price of the car. Not true. The only time a dealer may not be able to come down on price of a vehicle lease is if the vehicle is already being offered as a special deal or promotion. It’s important you negotiate the price of the lease since the final price of the vehicle lease will be the deciding factor of how much pay each and every month until your lease agreement is over.

Who is the Leasing Company? – It’s not the dealership?

Once you’ve negotiated your deal, worked out your payments on your car lease calculator and signed the lease agreement, the dealer works on behalf of a leasing company to finish the deal. Yes – the dealership is not the leasing company, the dealership works on behalf, like an agent, for the leasing company. Once you begin making payments on your lease, your dealing directly with the leasing company, not the dealership you leased the vehicle from.

The dealership simply is the medium to lease out the vehicle on behalf of the leasing company. Their function is to promote the car lease options, negotiate the lease deal and work out the terms of the lease agreement – all on behalf of the leasing company.

This is where it becomes interesting where many consumers don’t realize who they’re directly dealing with once they’ve signed the lease agreement. The consumer, you, will deal directly with the leasing company once you’ve signed the lease agreement.

So who are the leasing companies? Leasing companies used by dealers are usually subsidiaries of the car manufacturer (called "captive" leasing companies), such as Ford Motor Credit or General Motors Acceptance Corporation (GMAC) banks, credit unions and other lending institutions with whom the car dealership has worked out mutually beneficial business terms. Always check first with the dealership which leasing company the work with.

So remember, automobile dealers are in the business of providing cars, trucks, vans, bikes, SUV’s, etc.; leasing companies, banks, and credit unions provide the leases.

Can I Avoid the Middleman and Save $$?

You got it. You have the option to avoid the middleman, the dealership, and go directly to the leasing company, bank or leasing institution. The dealer is only a medium to sell a car lease. Generally a leasing company, bank, credit union or other leasing institution can offer better terms and price than the dealer.

The disadvantage to approaching lease companies and skip the dealer, is that sometimes the lease company will provide the dealership special promotions and prices to move the vehicles off the lot. As well with a dealership you have the convenience of managing all negotiating, the paper work, test drive, etc. all in one location. So essentially you may realize incentives with the dealer than if you dealt directly with the leasing company.

What Happens at the End of My Lease?

Simple put, at the end of your vehicle lease you drive your vehicle back to the leasing company. Hopefully the vehicle is in normal condition of wear and tear or you’ll end up paying for any damage or extra mileage over and above what you specified in the lease agreement.

Vehicle lease companies sometimes provide the option to purchase the vehicle for a specific price and the end of the lease agreement. This can be an option, but always check first as with some companies, it’s not outlined in the lease agreement or contract. Alternately you may be able to use the vehicle as a trade-in against a new car if you were to purchase. If buying out the vehicle or trading in the vehicle is not ideal for you, then simply drive your vehicle into the lot at the end of the lease agreement and you can walk away clean free. However, before you simply walk away, ALWAYS check first if you still have any equity value left in the vehicle.

Remember, to ensure you get best value as a consumer, ensure you check each option when returning your vehicle to get out of your car lease. The important options and lease considerations when completing your contract, or breaking your car lease, are…

• When returning the vehicle at the end of the lease agreement, ensure your vehicle has normal wear and tear, otherwise any damage you may have to pay the lease company.
• You may have the option to buy-out the vehicle from the lease company so that you own the vehicle 100%
• You may have the option to trade-in the leased vehicle against the purchase of a new vehicle
• When returning your vehicle at the end of the lease, always check for extra equity value.
• You do have the option to get out of your lease early – such as break your vehicle lease, swap your vehicle lease, bust out of your vehicle lease or trade your vehicle lease to another individual who is seeking to get into a lease deal, but not for the full term. This option is known as a short-term lease assumption and may not be presented to you by the dealer, but is available. More on transferring your car lease (define: auto lease transfer) further on in this guide.

Car Leasing versus Buying

Should you buy a new or used car or lease a car?

Which one is better – leasing or buying? Really, it all depends on your preference, one is not better than the other. However, the difference between the two is how comfortable you are within financing your vehicle.

Let us explain. Leasing and buying a new car are simply two different methods for vehicle financing. Leasing a vehicle is financing the usage of that vehicle, while buying a vehicle is the financing of purchasing the vehicle. Both have their advantage and disadvantages and one is not better than the other. It all depends on your preference of financing a vehicle. So the real question is which one is best for you?

Two factors to consider

1. Which financial option is best for you
2. Which one suites your personal priorities and obligations best

Questions you should ask yourself to help determine which option is best for you include:

• Is ownership more important than no down payment (define: down payment) and/or low initial costs
• Are long term costs more important to you and your family than lower monthly payments on your vehicle
• Is having a new vehicle every two to three years more important to you than long term vehicle costs, such as maintenance and repairs

So it’s not an easy decision which one is better than the other, but your deciding factor will be your financial and personal situation.

Difference Between Leasing and Buying a Car

Knowing the Difference Between Leasing Vs Buying a Vehicle

Leasing a Vehicle

Leasing a vehicle is purchasing only a portion of the vehicles overall cost. This is the cost of the time and wear and tear you put on the car for the duration you drive the vehicle.

Leasing a vehicle defines the time duration you’re leasing the vehicle (ex. 24, 36 months), how many kilometers or miles you drive, option to place a down payment (define: down payment), sales tax on your monthly payments in some provinces and/or states, extra fees where applicable such as a security deposit and pay a monthly rate that would be considered similar to an interest rate (define: base interest rate) on a loan.

Buying a Vehicle

You pay the full cost of the vehicle when you opt to buy a car or truck. You pay the entire amount of the vehicle regardless of how many kilometers or miles you drive.

Typically consumers place a down payment on purchasing a new vehicle and/or use a trade-in vehicle to leverage some of the cost of the purchase. Upfront costs can typically include the down payment (or trade-in), sales tax and interest.

When you purchase a car, the down payment will help reduce your overall monthly payments for the duration of your loan. Consumers typically acquire a vehicle loan from their bank (define: bank loan rate), credit union or other financial institution to help purchase the entire vehicle. Only est. 10% of consumers actually pay the full costs of the vehicle in cash. All fees and costs associated to purchase a new vehicle are typically rolled in the full cost of the loan, which is paid monthly to your financial institution you lent you the equity to make the vehicle purchase.

In some situations consumers may find the financial option of renting a car versus leasing a car, or buying a car, to be the preferred choice. Let’s look briefly at the differences between leasing a vehicle and renting a vehicle.

Car Leasing versus Buying Chart

Outlined below are the advantages and disadvantages of leasing a car versus buying a car.

Short Term Car Leasing and Renting a Car

As we previously learned, auto leasing is an option that lets you pay for the portion of a vehicle you expect to use over a specified term, plus a rent charge, taxes and fees. It’s another means of paying for your vehicle on a short term car lease basis – ex. 24 – 36 or more months. You get to “borrow” the vehicle from a leasing company for a monthly cost and upon returning the vehicle, the car dealer can sell the vehicle for slightly used.

The closest option of leasing compared to renting, is what is commonly known as a short-term car lease. A short-term lease provides the consumer significant savings over renting if you’re driving the vehicle for 17 to 175 days (or more, depending where you live and the lease agreement).

Renting on the hand is another means of acquiring a vehicle to drive, but on an extremely short term basis, generally with high costs on a per day basis. Renting is generally known as driving the vehicle for sixteen days or less.

Short Term Car Lease vs Renting a Vehicle

What Are the Differences Between Renting a Vehicle Vs Short-Term Leasing?

Renting a Vehicle

• Typically no residence restrictions
• Minimum age restrictions, typically 19 to 25 years (in most countries 21 is the minimum age). Often young driver surcharges are applicable. Some rental companies and countries may also have a maximum age restriction – typically 70 years of age.
• More selection of vehicles, including recreation vehicles (RV’s), sport utility vehicles (SUV’s), trucks, domestic and foreign cars including luxury and sport cars.
• A variety of locations to pick up and drop off the vehicle after the vehicle rental period has ended. Ex. Rent a sports car in Toronto , Canada and drop off in Los Angeles , California , USA . If the rental company is established in different countries, states or provinces, the option to pick up and drop off in any location is usually available. International one-way rentals may require drop-off fees.
• In most countries, collision damage waiver is extra, or requires paying a higher inclusive rate.
• Typical rates include VAT of 16-20% or more. Major city locations and centres, such as airports, may impose surcharges.

Leasing a Vehicle Short-Term

• A short-term vehicle lease can provide the consumer with significant savings if they’re driving for 17 to 175 days, or 1 year for teachers, students, and workers on temporary visas.
• Short-term leasing of a vehicle is available only to drivers who live outside the EU or how have temporary visas.
• Short-term leasing of vehicles may only be limited to certain vehicle types, depending on the country, state or province.
• Is only available to drives who are licensed and 18 years or older
• Short-term leasing have options to pick up and drop off at any authorized locations. Certain locations within Europe , excluding France , incur pick-up and/or drop-off fees.
• No VAT or airport or cit fees applicable
• Full insurance is included with no deductibles.

Now that you're aware of the differences between short term car leasing and renting a car, let's look at the advantages of a car lease.

Car Leasing Advantages & Benefits

Leasing a vehicle has its benefits and advantages. Leasing can be a great alternative to acquiring a vehicle than purchasing a new or used car. However, auto leasing may not be for everyone, as we’ve discussed earlier. It’s important to stress that leasing a car vs buying a vehicle is beneficial to only some individuals and not all. You must decide on which advantages and benefits are best for you as it applies to your own personal and financial situation.

Ok, no more lecturing, let’s get to it. The benefits of leasing over buying a new vehicle using a loan are as follows.

Car Maintenance - Car Leasing Advantage

The Remedy for On-going Vehicle Maintenance

A nice benefit of leasing a vehicle over buying, is you can define your lease terms, whether 24 to 36 or more months. The advantage here is consumers can tailor their vehicle lease term to the automobile manufacturer’s warranty coverage. Aligning the lease term with the warranty of the vehicle keeps you covered financially if anything major goes wrong with the vehicle. Take a survey of people who purchased a new or used car and you may be surprised to hear some interesting stories of major vehicle repairs before the warranty expires, and just after. New vehicles can have re-call components, especially if the vehicle make and model are new to the market place. Though keep in mind there are also disadvantages to car leasing.

Car Depreciation, an Advantage to Leasing a Car

Investments 101 – Buy What Appreciates, Lease What Depreciates

The average cost of driving a new car is rising faster than the average income. It makes economic sense to consider leasing your new vehicle. Vehicles can be one of the worst depreciating investments. As soon as you purchase a car and drive it off the lot, that vehicle has depreciated substantially. Your residual value is returned upon a fair value sale, but why wait out the years before that happens. So as to not loose on that investment into your vehicle, an option is to lease. Leasing a car may require no money down with approval, giving the consumer more money in their pocket – immediately.

Leasing means you only purchase the portion you agree too use, not the life time expectancy. This will reduce your monthly payments (define: base monthly payments). Financial advisors and experts agree that you should purchase items that appreciate in value, and rent or lease items that depreciate in value.

Car Leasing Savings

More Cash in Your Pocket – Initially

Typically vehicle leases require little down payment (define: down payment) if any. This stretches your wallet and provides you more savings in your pocket immediately. It provides an affordable means to get into a new or used vehicle, while leaving extra cash in your pocket for your other financial obligations, or to spend on a few cold ones. However, it’s important to note that you can choose to place a down payment on your vehicle lease in order to lower your monthly payment (define: monthly payment). You may even be able to reduce your monthly payments depending on how well you can negotiate your car lease deal, as some dealers may really want to make that sale quota at months end.

Less Monthly Payments When Leasing

Your Money – Your Car

Leasing gives you the flexibility to secure the vehicle you want and not settle for what you can afford. Remember, leasing gives you lower monthly payments (define: base monthly payments), which gives you extra money to spend on a higher-end vehicle you want. However this may all depend on the type of car lease you choose.

Less Monthly Payments

Since you’re vehicle lease is only for a certain time duration, your monthly payments will reflect the difference. Remember, you’re only paying a portion of the vehicle you use, so your monthly payments are typically lower than if you had purchased the vehicle – assuming you purchased the vehicle using a loan from a bank (define: bank loan rate), credit union or another financial institution.

Lease Your Dream Car

Vehicle Options

The turn-over of a vehicle is typically less if you’re leasing the vehicle vs purchasing a vehicle. So if you’re the type of person who likes to change the vehicle you drive every 2-3 years, leasing is a great option since after the 24 to 36 months, you simply return the vehicle, or transfer the car lease, and lease a new one.

Your Dream Car! – Ok, Semi-Dream Car

Because you’re only leasing a portion of the vehicle over a specific time period means your monthly payments (define: base monthly payments) will be less than if you purchased a new vehicle with a loan. With the savings you gain from the lesser monthly costs, can be used towards affording a higher grade vehicle. So essentially every few years (depending on the length of your lease term) you can turn-over your vehicle for a newer, more expensive vehicle. Though don't forget to always consider you car leasing options.

Lower Taxes and Stress with Car Leasing

Lower Taxes

In certain locations, such as in most states of USA and provinces of Canada , you don’t pay the car lease sales tax on the full value of the car or truck when you opt to lease. The only portion of the vehicle you as a consumer pay tax on is the portion you use. Additionally, the taxes you pay is spread across your monthly lease payments.

Less Obligations and Stress

When you terminate a car lease, or at its lease end, you simply drive your vehicle back to the lease company and you’re done – well unless you opt to purchase the vehicle or turn the vehicle in as a trade-in. Now, try selling a used vehicle if you purchased it….well, I’m sure we all know the headaches that can bring. True, selling a used car is quite common, but returning a used vehicle and walking away is easier. Any headaches associated to selling a vehicle are gone.

Car Leasing Advantages

Summary of Car Leasing Advantages

Ok, so I’ve outlined to you a few of the advantages and benefits of leasing a vehicle. It sounds great and the best option, but remember, buying a vehicle vs. leasing a vehicle both have their advantages and disadvantages. The best option is based on your personal and financial obligations. So what are the disadvantages to leasing? Let’s take a look at the next topic – disadvantages of leasing a vehicle.

In summary, the quick points on the advantages to leasing include..

• A lower monthly payment than you would pay on a loan for the same vehicle
• You pay tax only on the monthly payment rather than up front on the full price of the vehicle (some American states may vary).
• The opportunity to drive a new vehicle more often
• The comfort of knowing you vehicle is under warranty for the full duration in the case of the short term (2-3 years) lease
• You have options at lease end (return the vehicle, buy the vehicle if you lease has a purchase option, or let the leasing company sell it.)
• The additional money you save by leasing can be used for personal investments, family, entertainment or increased payments for a higher end vehicle. You avoid tying up your money in a vehicle.

Disdvantages of Car Leasing

So what is the biggest disadvantage of leasing a car (or any other vehicle for that matter)? The main disadvantage of car leasing is that you are held to a car lease contract, which can be costly if you wish to break your lease. Y ou're putting money into a car that you won't own. However, there are options available for you to break your lease, or transfer your lease (define: auto lease transfer). We’ll provide more detail on how to transfer your car lease later in this guide.

Really, the only major disadvantage to leasing a car is that in the long run, you the consumer will spend more money than through financing or by paying cash for the vehicle. But this is a decision you should make before you even consider leasing. If you’re only in for the short to medium term, then yes, leasing a car can be a great option, and you may have the option to transfer your car lease to another consumer - who would then take over the reaminder of your lease - considered a short-term car lease. But if you plan to later purchase the vehicle 100% out-right, then yes, you will end up spending more for the car than if you purchased it.

While what I’ve outlined above is really the only major disadvantage to leasing, there are a few minor tips you should be aware.

When you’re seeking to lease a new vehicle, many car buying books mention one of the first strategies to negotiating with the dealer is not to tell them you wish to lease the vehicle until you negotiated a reasonable purchase price (define: purchase price). This strategy will prevent the salesman from any lease terms to hide the true sales price of the car. If a dealer knows that you're not going to buy from them they may get all they can on the wear and tear charges within the lease. So spend your time learning of the lease rates (define: lease rates) to determine if they’re reasonable, or whether or not you can afford the payments.

Disadvantages of Buying a Car - Warranty and Repairs

When considering buying a new or used car versus leasing a car, consider these disadvantages to purchasing a new vehicle.

Warranties and Repairs

Yes, new cars come with warranties that cover your wear a tear of the vehicle, but what happens once this warranty expires? Assuming you did not consider purchasing an extended warranty (define: extended warranty); maintenance and repair costs on a vehicle are an important consideration when buying a car. In the first two to three years of a new car's life it has fewer problems and is typically covered by a comprehensive bumper-to-bumper warranty. Though once the warranty expires, costs can add up. This is when you may see more used vehicles on the market – people selling their vehicle after the warranty expires.

With an expired warranty, the consumer is stuck with paying out of pocket for the repairs and maintenance. While it’s expected you’ll pay regardless of wear parts over time, such as tires, replacing lights, brake pads, etc. that wear down over time, any major repairs can be costly – especially if you go back to the dealership for those repair parts.

When buying a new or used car, always consider the warranty life value and if any extended warranties are available. Warranties will save you much stress of costly payments on repairs that results from faulty parts or miss-use of the vehicle.

When buying a used car, you’re always at risk of buying a junker. Always consider getting a thorough vehicle inspection by yourself or a reliable mechanic you trust. This will help discover any potential risks before purchasing. There is the option to purchase certified used cars which provide a professional screening process and a warranty, though you will be paying extra for those guarantees.

Car Depreciation - Disadvantages of Buying a Car

Car Depreciation

One of the worse disadvantages in buying a new car is the cars depreciation value. A cars depreciation (define: depreciation) is rapid within the first few years. Vehicles lose around 45% of their value within the first three years, however this can vary among different vehicle makes and models. Most luxury cars hold a higher value against depreciating costs over the first few years, but it’s nothing you can escape from. You can attempt to reduce vehicles value that you pay for, and in sense minimizing the depreciating value through thorough preparation before negotiating with the dealers.

What determines the depreciation value of a car? A few factors go into determining the depreciating value of a car or truck or any type of vehicle for that matter. Consider the model’s popularity, perceived quality, supply and demand of the car.

Regardless, after the first few years the car will take a huge hit in its residual value.