If you plan to buy a new car this year, consider that you can buy it on credit or lease it. But before choosing between these schemes, consider your needs. If a brand new car is within your tastes or priorities, a lease is an excellent way to have a new model every 2 or 3 years.
You don’t have to be thinking about selling the car or being tied to a loan’s maturity with a lease. Many people who buy a vehicle can only pay for it after 4 or 5 years, by which time the manufacturer’s warranty has expired, the miles are many, and the repairs are many. This makes resale difficult.
Auto leasing is renting a vehicle for a specific period, usually between 6 months and 5 years. At the end of this time, you have the option to buy the car (or continue with the lease) for a certain amount. This amount is called residual value and is the car’s value at the end of the contract.
The car lease has requirements that must be met to avoid additional charges at the end of the contract.
- Mileage charge: the contract will specify the mileage limit. If the limit is exceeded, an additional fee will be charged. This mileage is 10,000 miles per year on average.
- Bump or dent: Bumps to the car may require additional fees or repair of the damage.
- General car maintenance: Usually, the car should be kept in good condition and regularly maintained.
You may have to make a down payment with an auto leasing contract and then pay monthly fees for the contract’s duration. Several options do not require a down payment, but this will cause the monthly payments to be higher.
The down payment on an auto lease only consists of the car’s first rental and the processing fees. In this way, it is cheaper than the down payment of 20% of the vehicle’s value generally required for a car loan.
With an auto lease, you also pay interest basically on the value that is “loaned,” which is the difference between the vehicle’s current value and the car’s residual value at the contract’s expiration. This interest is usually called the money factor and will depend mainly on the credit score.
Among the advantages of auto leasing is that every new vehicle that leaves the dealership loses 20% of its value. Each year, it loses a large percentage of its initial value. This is not a concern for a person who leases a car because the rent does not depend on the car’s value and the monthly payments are lower.
Also, since you only pay rent, you avoid high-interest rates present in other financing models’ monthly payments.
Once the auto leasing contract is terminated, the lessee has three options:
- Acquire ownership of the financed vehicle by executing the purchase option for a residual value.
- Enter into a new contract on the exact vehicle.
- Return the car to the auto leasing company that lent it to him.
In general terms, auto leasing is aimed at companies, businesses, and professionals. In addition to financing, auto leasing usually offers more advantageous taxation than other financing formulas.