Auto Lease

Auto Lease
An auto lease is a financial arrangement that enables an individual to obtain a vehicle for use without paying for it entirely. They get access to the vehicle for a certain term (usually two to five years) and then return the vehicle at the end of that period, sometimes with an option to buy it outright.

What is an Auto Lease?

An auto lease is a financial arrangement that lets a person rent a car, truck, SUV or motorcycle for a period of time. At the end of the lease, the lessee can then return the vehicle. However, many leases do give the lessee the option of purchasing the car at the end of their lease term.[1]

How does an Auto Lease work?

In many ways, an auto lease is similar to renting an apartment. When an individual leases a car, they do not own the vehicle outright, much the same way that someone renting an apartment does not own that piece of real estate. With an auto lease, a person can return the car at the end of their lease and get a lease on a new car, much like how a person can move to a new apartment once their lease is up.

Auto lease terms and conditions often have penalties for wear and tear or mileage that is put on the vehicle above a predetermined amount. When the lessee (or the person making payments on the lease) returns the vehicle, they might owe additional money beyond their monthly payments.

While leasing a car means that the lessee won’t own the car outright, this is not necessarily a benefit or a drawback. Unlike most houses, cars tend to depreciate in value over time. So while a person who buys a house (or rather takes out a mortgage loan to buy a house) can reasonably expect to sell that house for more than they bought it for, the same is not true for cars. A person who buys a car for $20,000 could find that the car is only worth $10,000 when the time comes for them to sell it. This is known as depreciation.[2]

On the other hand, owning a car outright means not having to make monthly loan payments on it. But with a lease, the lessee will always be making lease payments.

What are the advantages of leasing a car?

Depending on your situation, there could be several advantages to leasing a car rather than purchasing one.

  1. Less hassle. Most often, lessee’s don’t need to pay a down payment toward the lease of their vehicle. You just have the monthly payments, and then at the end of your term, you return the car. Leasing can be a fairly easy, straightforward process.
  2. Lower monthly fees You can typically expect to pay less monthly for leasing a car than you would for taking out an auto loan.
  3. Drive later model vehicles Because lease terms are usually fairly short, leasing a car can be a great way to use a more recent model car than you might be able to afford to purchase on your own.[3]

What are the disadvantages of leasing a car?

Leasing a car may seem like the right choice for you on the surface, but like any major financial decision, there can be disadvantages that should be considered. Possible disadvantages include…

  1. More expensive. While the lower monthly payments of leasing a car are certainly attractive, in the long run, leasing is actually more expensive than if you pay off a car outright and use it afterward. The more use you get out of your car after paying it off, the more value you’ll derive from your purchase. With a car lease, your monthly payments don’t result in car ownership.
  2. Limited number of miles. You may have use of the vehicle, but there are typically limits to the mileage you can put on the car while it’s in your possession. (Usually you’re limited to 12,000 miles a year, though you can always purchase more).
  3. You’re responsible for the car’s condition. When leasing a car, you can expect to be financially responsible for the condition of the car when you return it. Also, you aren’t able to modify or customize the car in any major way.[4]

What is the difference between an Auto Lease and an auto loan?

With an auto loan, a person is borrowing money in order to purchase a vehicle. Auto loans are a kind of secured loan, which means that the vehicle serves as collateral. If the borrower fails to make their loan payments, the lender can repossess the car and sell it in order to recoup their losses.

A person who pays off their auto loan in full then owns the vehicle outright. Although motor vehicles depreciate in value over time, owning one could still increase a person’s total net worth. If they wanted, they could sell the car and collect money from the transaction.

With an Auto Lease, the person is not taking out a loan. Instead, they are simply renting the vehicle from its real owner. At the end of the lease, they will not own the car or truck they were renting. While this means that lessees do not have to worry about depreciation, it also means that their lease has not done anything to increase their net worth.

Auto leases generally come with lower monthly payments than auto loans, but they do usually come with higher insurance premiums too. This is because most insurance plans for leased vehicles include gap insurance, which pays off the remainder of the vehicle’s value.[5]

References:

  1. “Understanding Vehicle Financing.” Federal Trade Commission: Consumer Information. Retrieved October 6, 2016 fromhttps://www.consumer.ftc.gov/articles/0056-understanding-vehicle-financing

  2. “Depreciation.” Investopedia. Retrieved November 4, 2016 from http://www.investopedia.com/terms/d/depreciation.asp

    http://www.investopedia.com/terms/d/depreciation.asp

  3. “Pros and Cons of Leasing a Car.” Consumer Reports. Retrieved November 4, 2016 from http://www.consumerreports.org/cro/2012/12/pros-and-cons-of-leasing/index.htm

  4. “Should You Lease or Buy Your Car?” Edmunds.com. Retrieved November 4, 2016 from http://www.edmunds.com/car-leasing/should-you-lease-or-buy-your-car.html

  5. Smith, C. “Buying Vs. Leasing a Car: What’s the Smarter Choice?” Ready for Zero. Retrieved October 28, 2016 from http://blog.readyforzero.com/buying-vs-leasing-a-car/#.WBOi9uArKCh