Leasing is a form of financing for assets that decrease in value. If you lease a car, you are arranging to pay for the amount that the car depreciates over the term of the lease. With a lease, you do not own the vehicle. At the end of the lease, you can turn the car in to the bank or leasing company that financed the deal.
Function
A vehicle lease allows a driver to have a lower payment than he would have if he bought the vehicle. If you buy a $30,000 vehicle, you have to finance and pay for the entire $30,000. Over the time period of a lease, you would only pay for the depreciation of the vehicle, which could be as low as $15,000. The lower overall amount translates into a lower payment over an equal length of time. Since the payment is lower, a person can lease a more expensive vehicle than he could afford to buy. A lease is also an attractive option for drivers who like the idea of having a new vehicle every three or four years.
Residual Value
The residual value is the amount that the leasing company or bank estimates that the vehicle will be worth at the end of the lease period. This is an important factor in your monthly payment. If two vehicles both sell for $25,000, and one has a residual value of $15,000 and the other $11,000, you will pay less per month to lease the first one, because you are paying off a lower amount. This is true if all other terms of the lease are the same. You can find the residual value in your leasing documents, and the residual value usually reflects the amount you would pay to buy the vehicle at the end of the lease.
Types
There are two types of leases: closed-end and open-end. At the termination of a closed-end lease, you turn the car in, settle up for any mileage overage, damage and excessive wear and tear, and walk away. If the vehicle's value is lower than the expected residual value stated in the lease documents, you are not responsible for the difference. With an open-end lease, however, you would be responsible for this difference at the end of the term. Most consumer auto leases are closed-end, but check your lease documents carefully.
Time Frame
Automotive lease terms, or the length of time of a car lease, are commonly 24, 36, 48 or 60 months. Sometimes, leases have odd terms, like 30, 39 and 42 months. This can result when dealerships try to get people in during slow sales times to buy new vehicles.
Misconceptions
Some may think that since a lease never mentions an interest rate, it does not have one. Leases do have a form of interest rate called a "money factor." This is a finance charge on the money that the bank or leasing company had to pay to buy the vehicle to lease it to you. Leasing companies show money factors in small decimal numbers. If you multiply the small decimal number by 2,400, however, you will get the equivalent of an annual interest rate for comparison purposes. The money you pay will be close to the interest rate you would pay if you bought the car.
Warning
Leases have mileage allowances, commonly between 12,000 and 15,000 miles per year. If you go over these allowances, there will be a charge at the end of the lease that could be as high as 25 cents per mile. If you need more than the mileage being offered, it is usually less expensive to purchase the mileage at the time that you sign the lease. Also, do preventive maintenance according to the manufacturer's requirements and keep records of the maintenance. You could be charged extra if you do not do this.
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