If you are like many people, you may not understand the difference between leasing a car vs. purchasing a car. I didn't before I went into the automotive arena and even for a time afterwards I still wasn't sure how it really worked. There are many rumors that abound regarding this process and some have instilled fear into the prospective leasees. Let's talk about some of those and hopefully we can debunk some fears and misconceptions.
One fear I continually hear from those who don't want to lease is "I knew someone who leased a car once and they hated it". When leasing first came around years ago the had what they called the "open end lease". The dealer didn't have to tell you what the price of the car was, what your interest rate (money factor on a lease-we will talk about that later) or even what your residual (the price you had to pay for the car at the end of the lease) was. They only had to get you to agree on a payment that may or may not fit into your budget. Many unscrupulous dealers would close their customer on a high payment that would allow them to actually lease you a vehicle way above the MSRP! The only thing they were required to disclose to you was the lease payment. They could play with your trade numbers, down payment, lease term, and price of the car.
That practice is regulated now by law and is a thing of the past. Now a dealer must fully disclose all the numbers to include what you are paying for the car, how much down, what you are getting for your trade, the aforementioned money factor, and what your guaranteed residual (what you could buy the car for) was at the end of the lease term. It is important to note that all of these for the most part are negotiable too. On a lease you pay a money factor vs. an interest rate like you would on a finance purchase. To convert the money factor into an interest rate you can get an approximation by multiplying the money factor by 2400 (for example a money factor of .00205 x 2400=4.92-the equivalent interest rate is 4.92%)
Another fear or comment is "I want to own my vehicle". Well if you are like most people and you finance a car you don't own it the bank does. With a lease you are paying for the portion, or the time, of the car that you are leasing. The result is that your payment is generally lower and you pay tax only on the lease payment amount, not the whole purchase price. Leases are best when kept to the shortest term available (I recommend no more than 36-39 months). This way you are usually covered by the vehicles factory warranty which can give you pretty much worry free driving. With the average comprehensive factory warranty being 3 years 36000 miles all inclusive warranty vs. the average finance term of 5.5 years you can guess who pays for repairs after that warranty runs out.
At the end of a lease you the consumer have three (3) options. 1. If the car is worth more than your residual you have the right to sell that car on your own and pocket the difference or use it towards the lease (or purchase) of another vehicle. 2. If you absolutely love the car and want to keep it you can purchase it for the residual that was guaranteed up front (most dealers will be happy to arrange financing for you but you can arrange your own as well). 3. If the residual is higher than the market value you can simply turn the car in to the dealership and walk away. How many of you have been able to do this on a vehicle you purchased on a finance contract and find out when you are trying to trade it in only to find out you are "upside down"? The average car buyer like to trade or "get something new" every three years. Wouldn't it be nice to get a new vehicle every three years anyway?
Leasing isn't for everyone by any means but can be advantageous for most and if your a business owner the benefits can be even better (check with your accountant). To find out is leasing is right for you you can take this
simple test to find out. Next time you consider that next vehicle purchase be sure though to look into leasing.
