Yahoo Autos What Is Car Leasing? Pros and Cons of Leasing a Car
What is car leasing? It's one way to acquire a vehicle in your name. A leased car allows you to rent a vehicle in return for making monthly payments. Leasing a car has many benefits, but it might not be the best option for everyone. Learn everything you need to know about car leasing.
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What Is Car Leasing?
When you lease a car, you pay monthly to drive a vehicle. At the end of the lease agreement, you return the vehicle to the dealership. Unlike when you buy a car, you don't own a leased vehicle. Essentially, car leasing is renting a car for a short or long period.
The length of the lease and how much you pay monthly depend on your specific lease agreement. Your lease agreement will require you to make monthly payments. At the end of the lease, you might have the option to buy out the vehicle if you want to keep it. Otherwise, you return the car to the dealership.
How Long Is a Car Lease?
Car leases can be anywhere from two to five years long. The average length of a car lease is 24 to 36 months. How long you lease a car will affect your monthly costs and mileage allowance. Longer leases usually qualify borrowers for cheaper monthly payments.
You also want to choose a lease period that fits your lifestyle. Returning your lease before the lease period is over can be costly, so try to predict when you'll be ready to exchange it for a new car.
What Are the Requirements for Leasing a Car?
The specific requirements for leasing a car depend on the lender. However, lease requirements usually include:
A Good Credit Score
You typically need a good average credit score to qualify for an auto lease. Fewer lenders offer leases to borrowers with less-than-perfect credit. Also, even though you don't own a lease, the lender reports your monthly payment to the credit bureaus. This means making late payments or missing payments can affect your credit score.
Proof of Consistent Income
Lenders also require lessees to have proof of consistent income to qualify for a new car. The minimum income requirements will vary based on the lender and the vehicle's lease or purchase price. You can prove your employment with pay stubs or tax returns.
Proof of Insurance
Leasing companies also require proof of insurance before leasing a vehicle. You must show proof of insurance covering the lease's entire purchase price. Remember most lease terms require drivers to carry auto insurance for the length of the lease.
Defaulting on your insurance during the lease could void your agreement. The lender might also purchase their own insurance for the vehicle and push the cost off to you.
Valid Driver's License
Leasing contracts require borrowers to have a valid driver's license. Whether you lease a new or used car, you must provide the lender with a copy of your driver's license. Make sure your driver's license information is up to date and matches your lease application details to help speed up the process.
Benefits of Leasing a Car
Leasing a car comes with a few benefits, including:
Minimal maintenance and repair costs: Most leases cover the cost of maintenance and repairs, which can ensure you always have a working vehicle. While some wear and tear is expected, you might be charged for anything extreme.
Opportunity to drive a new car frequently: Car leases tend to be much shorter than the length of auto loans. This means you can drive newer cars more frequently.
Fits short-term living arrangements: Leasing might be a good option if you live in an area for a short time, such as when you're away at college. You have a car to drive for a few months, then you can return it when you're ready to leave.
Access to the latest features: Driving new cars means you get access to the latest features and technologies. You can also qualify for a lower monthly payment while still taking advantage of the best safety and entertainment features.
Leasing is a great way to afford a brand-new car without paying too much. In most cases, leasing is cheaper than buying the same car.
Car Lease vs. Car Loan
Not sure if a car lease or car loan is right for you? Here are a few differences to compare as you shop for your new vehicle:
Car Payment
You'll have a car payment with both a lease and a loan. However, lease payments tend to be slightly cheaper than car payments. This is because you're not building equity with a lease and don't own the car after you're done paying.
When you lease a car, you're paying for the estimated depreciation of the car's value while you drive it. When you buy a car, you're paying off the value of the car and gaining equity instead. The leasing market is a great alternative for drivers who want to drive a new car while still keeping loan payments affordable.
Mileage Allowance
Leases often come with mileage limits. While you can exceed this limit, you'll usually pay a per-mile rate. When you buy a car with an auto loan, you can drive as many miles as you want.
Lending Options
Leasing is usually only available through a dealership. You can go through a bank, finance company, or credit union when you buy a car. This means you might have fewer lending options if you choose a car lease. If you have bad credit, you might find it even harder to find a lender that meets your eligibility criteria.
Getting Out of Your Payments
Getting out of a car lease can be much more difficult than getting out of an auto loan. If you no longer want to make your payments on an auto loan, you can sell your car or trade it in for a different one.
Getting out of a lease payment usually requires you to pay hefty penalties. Some drivers might prefer this, though. You can simply return your vehicle to the dealership at the end of your lease contract. If you own the car, you'll have to deal with finding a seller.
Warranty Options
Most lease vehicles are still under warranty. This means if you have any expensive repairs, they're likely to be covered. Some wear and tear is normal when driving any car, but a lease can help you cover unexpected costs.
Customization Options
Your ability to customize your car with aftermarket parts is limited when you drive a lease. Because you must return your leased vehicle at the end of the agreement, you can't make any permanent changes. When you own a car, you can make as many changes as you want, even if you have an auto loan.
Handling Car Accidents
While you need auto insurance with both an auto loan and a lease, the claims process differs for each. If you're in a car accident and your leased car is totaled, you'll file a claim with the insurance company but still owe the dealership the remaining balance on the lease. You can either roll that into a new lease, pay the balance with the insurance money, or cover it out of pocket.
If you total your car with an auto loan, you must seek payment from the insurance company to pay off the lender and then decide what to do with the car. It will likely have a salvaged title, meaning you might have a hard time selling it.
If your leased car suffers repairable damages, you'll turn to your insurance company to cover them just as you would with a car loan. A car accident might affect your car's current market value, but if you signed a closed-end lease, the value of your car doesn't matter at the end of the lease.
Moving Out of State
Most dealerships require you to return your lease to the same company where you originally leased it. This means if you move out of state in the middle of a lease contract, you must return it to the original leasing company when your lease expires. When you buy a car, you can move wherever you want as long as you continue making your monthly payments.
How to Lease a Car
You can lease a car with the following steps:
Compare the Pros and Cons of Leasing
Before applying for a lease, compare its pros and cons. Find out if a lease makes sense for your driving habits and lifestyle. Consider if you want to give up your car at the end of the lease. Compare the costs of the same car if you were to buy or lease it to get a better idea of how much you can expect to pay for both.
Check Your Credit Score
Your credit score is an important part of determining your eligibility for a lease. Checking your credit score ahead of time can help you know what to expect. The average credit score for a lease is between 680 and 739.
The higher your credit score, the better interest rate you're likely to receive. While you might be able to get a lease with a lower credit score, you'll usually be required to pay a higher down payment. Improving your credit score before applying for a lease could result in a more attractive monthly cost.
Research Lenders and Create a Budget
Research and compare lenders before choosing one. You want to choose a lending company that offers an affordable monthly payment, which they usually calculate based on the car purchase price and the estimated capitalized cost reduction. A larger down payment can help you lower your monthly car payment.
Choose a Car and Negotiate
You can negotiate the cost of a lease just as you can when buying a new car. Do your research on any vehicles you're interested in leasing. Consider the average vehicle purchase price and how much other lenders are charging for similar lease agreements. Use this information to negotiate the best price.
Calculate Your Miles
Calculating how many miles you drive each year can help you choose the best lease term. Be realistic regarding the number of miles you drive, and leave room for error. It's best to overestimate your mileage to avoid expensive overage fees.
Apply for a Lease
Once you find a lender you want to lease through, submit an application. The process of applying for a lease on your next car is similar to the application you'd submit for a car purchase.
The Motor Vehicle Leasing Disclosure Act requires lenders to follow certain rules. One of these rules is they must provide you with a copy of all documents you sign. Review these documents in detail to make sure everything is as you agreed.
How to Get the Best Lease Rates
Your lease term and cost vary depending on your leasing company, the interest rate, the down payment, and the car's capitalized cost. Here are a few tips to get the best lease rates:
Compare the Costs of Buying vs. Leasing
Comparing the costs of buying versus leasing is easy using a comparison calculator. Input your location, the sales price, the tax rate, and any extra fees to determine which option is most affordable.
Negotiate the Capitalized Cost
Negotiating the cap cost of your lease is a great way to get lower monthly payments. Any money you put down on the car in the form of a down payment reduces the cap cost and your monthly lease payments. This is called the capitalized cost reduction.
A higher capitalized cost reduction can result in cheaper payments. Qualifying for any leasing incentives or rebates can also reduce your cap cost and lease payment.
Calculate Your Money Factor Ahead of Time
You can calculate your car's money factor by asking the dealership what they charge and then multiplying it by 2400. This gives you the interest rate. Some dealerships allow you to negotiate the money factor, which can also help you get cheaper monthly loan payments.
Lease a Used Car
While finding lenders that lease used cars might be difficult, it's not impossible. More dealers today offer leases on used cars. This usually includes leasing a certified pre-owned car, which means it has undergone extensive inspections. Be sure to find out what's included in the used car lease and if a factory warranty is still available.
Things to Know before Leasing a Car
Before leasing a car, it's important to know a few key terms:
Open-End vs. Closed-End Lease
Leases have either open-end or closed-end terms. An open-ended lease means the dealer will calculate the value of the car after you return it at the end of the lease. If you maintain it well and it's worth more than expected, you could receive a refund. If the car's residual value is worth less than expected, you could be subject to wear and tear fees and have to pay hefty penalties.
A closed-end lease means the value of the car doesn't matter when you return it. You shouldn't owe any extra fees when returning the vehicle, as long as you didn't exceed the mileage allowance.
Residual Value
Before you begin a lease agreement, the dealership will determine your vehicle's residual value. The residual value refers to the estimated value of your vehicle at the end of your lease. As long as you choose a closed-end lease, this number doesn't mean much to you. The dealership is responsible for any unexpected changes in the vehicle's residual value.
Rent Charge
The rent charge is what dealers refer to as the cost of leasing the vehicle. This is similar to the annual percentage rate, or APR. The rent charge might also be called the "money factor." The lower the money factor you qualify for, the lower monthly lease payment you can expect.
Capitalized Cost
Capitalized cost, sometimes referred to as cap cost, is how lenders calculate your lease payments. Leasing a car with a lower cap cost means your monthly lease payments will be lower. The cap cost might be similar to the manufacturer's suggested retail price, or MSRP.
Mileage Limit
Most leases have mileage limits. Your mileage limit will depend on the total length of your car lease. Longer leases come with a higher mileage allowance. If you exceed your car's mileage limit, you can pay a hefty fee per mile. This is why it's a good idea to predict your mileage use before signing a lease because you can't add or buy miles in the middle of a lease.
Acquisition Fee
The acquisition fee is the price the lender charges to originate or close the loan. This administrative fee is common with any leased vehicle. While you can expect most lenders to charge some type of an acquisition fee, it shouldn't exceed more than a couple hundred dollars.
How Does Insurance Work on a Lease?
Insurance is still a requirement with a lease. In addition to the minimum insurance requirements of your state, you must meet your lender's insurance requirements. Most lenders require lessees to carry full coverage on a leased car to protect the vehicle's full residual value.
This is similar to taking out a car loan, where the lender requires you to have sufficient coverage for the vehicle's value. Leasing companies also require most drivers to carry full coverage when leasing a vehicle. The lender might require GAP insurance, as well.
Gap insurance is guaranteed asset protection coverage, and it covers the difference between the actual value of your vehicle and the leftover amount on the lease if your car is totaled. GAP insurance is in addition to comprehensive and collision insurance.
Your Options at the End of Your Lease
Unlike when you buy a car, you don't own a leased vehicle. This means you must return the car at the end of the lease. The length of a car lease agreement depends on your lender and the length you choose. You might be able to get out of your lease early, but most lenders will charge you an early termination fee. This fee covers the cost of relisting the car and leasing it or selling it to someone else.
Otherwise, you have two options at the end of your lease. You can return the car and buy or lease another one. Returning the car usually means you'll be responsible for paying a disposition fee. This fee covers the cost of repairs, cleaning, and transferring ownership.
You can also buy out your lease if your lender allows it. The price is usually calculated based on the value at the end of the lease plus any required sales tax.
Some lenders might allow you to extend your lease, but this is less common. Extending your lease isn't usually a good idea because the lender will often charge you a higher monthly payment than you were originally paying. You're also likely to get closer to your mileage limit, which means you might be subject to excess mileage fees.
Should You Buy Out Your Lease?
Whether you buy out your lease depends on your financial situation and if you like the car you're driving. Buying out a lease means you'll continue making your monthly payment, only now it will earn you equity. If you're tired of leasing a car, buying out your lease might be the best option.
Car leasing is a great alternative to buying a car. Leasing a car means you can drive a new car every couple of years. It's important to compare car leasing advantages and disadvantages to decide if it's right for you. Then, compare lenders and rates to get the most affordable payment.
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