What is Car Leasing ?
Car Leasing is Often Not Well Understood, Even Greatly Misunderstood
Leasing is nothing more than a method of paying for the use of a car, truck, SUV, or van over a specified period of time. Sounds like renting, but don't get the two confused because they are very different. While you can rent a car for as little as a day, or even a few hours, leasing typically starts at 24 months and doesn't provide for easy termination or vehicle swapping.
Leasing is a form of auto financing; renting is not. It is not a dealer trick or scam. It is a long-time well-respected form of business financing for motor vehicles, construction equipment, buildings, airplanes, and ships. However, consumer leasing for automobiles only became popular in the 1980s as people began to look for more affordable ways to acquire the new cars they wanted.
Price is Important in Leasing
When you lease, you negotiate a purchase price with the dealer just as you would if you were buying. This key point is not well known and dealers have even told customers that, because it's a lease, lease price is always full sticker price. This is simply not true. Generally, the only time you would not need to negotiate price is when the dealer is offering a special manufacturer-sponsored deal in which the price and other factors of the lease are already set to attract your business.
If you don't like negotiating, get already-discounted price quotes online from Edmunds or InvoiceDealers. A local dealer who has the car you want will contact you and confirm the price. That discounted price will be the price your lease will be based on.
A new service has come along that may offer the lowest new-car prices yet. The company is TrueCar. They not only show you a car's MSRP and invoice price, but also what buyers in your area are actually paying for that car. TrueCar then lets you print out a certificate that guarantees you a price savings at your local dealers, without the usual haggling.
Once you and the dealer agree on a price, and you've signed the lease contract, the dealer actually sells the car to the leasing company at that price. The leasing company then leases the car to you, based on that price. For that reason, price becomes the most important factor in what you'll pay in monthly lease payments.
The Car Dealer is Not the Leasing Company
A car dealer simply acts as an agent for the leasing company (usually the car maker's finance company, such as Ford Credit) so that you don't deal directly with the leasing company until you start to make monthly payments. The dealer works out the terms of the leasing agreement with you on behalf of the leasing company. For this service, the leasing company usually pays him a commission, which adds to his profit on the deal. Once the contract is approved and signed, your relationship is with the leasing company, not the dealer, unless it's an issue with the vehicle itself.
So, automobile dealers are in the business of providing automobiles, but leases are provided by automobile finance companies with whom the dealers work.
A few years ago it was possible for consumers to bypass dealers and independently arrange car leases with large banks and outside finance companies. Since the financial "crash" of 2008-2010, it has become almost impossible to do so. Nearly all leases are arranged through car dealers.
The Leasing Process
You decide on the car you want and negotiate your best price with your dealer (or get a pre-arranged price or promotional lease deal). The dealer will calculate your monthly payment (see Lease Payments) based on the negotiated price and other non-negotiable factors, such as finance rate, that are provided by the leasing company. You may lower your monthly payment by making a cash down payment if you choose. Your payment will also include sales tax (in most states and Canada) based on where you live.
At the time you sign your lease contract, you will be required to pay your first month's payment (lease payments are always paid at the beginning of a pay period, not the end), as well as any official tax, tag, and registration fees required in your locality. Some leases may require an up-front security deposit that you get back at lease-end.
What it Means to Lease
Signing a car leasing contract means that you agree to make regular monthly payments, maintain your vehicle, keep appropriate auto insurance, pay local vehicle taxes and licensing fees, and take good care of the vehicle. Further, you agree that you'll keep the car for a specified number of months typically 24, 36, or 39 months and you're expected to stick it out to the end.
Just to be clear, when you lease a car you are responsible for all maintenance, service, insurance, tags, taxes, and local fees just as if you owned the car. Remember, leasing is not renting.
Your car will be covered by the manufacturer's new-car warranty. If the warranty is good for 3 years, and you lease for 3 years, your car will always be covered for your entire lease term.
At the End of Your Lease
At the end of a lease you're expected to return your vehicle to the leasing company with no more than normal wear and tear. You'll have to pay for any excessive damage or extra mileage over and above your contract-specified limits. Most lease finance companies are very lenient regarding "forgiving" damages such as small dents and scratches. Customers are expected to repair major damages.
You may have an option to purchase your vehicle at lease-end for a specific guaranteed price, if you choose. You may also use the car as a trade-in on another new car purchase or lease. Otherwise, you can simply return the vehicle to the leasing company and walk away.
You might be required to pay a lease-end disposition fee. If you decide to return, be careful because you might just have equity value in your vehicle that you don't want to simply give back to the leasing company.
Making the best decision about what to do with your vehicle at lease-end returning it to the leasing company, buying it, trading it, or extending your lease requires that you look at each option carefully and evaluate the trade-offs. Our Lease Kit includes a section, Lease-End Advisor, that provides details and instructions.
Canadians should particularly confirm that their lease contract specifies a lease-end purchase option, if you think you'll want it. It's not automatically included in the contract.
For anyone thinking about leasing an automobile, it's very important to understand what leasing is — and what it is not — and how it works. That's what LeaseGuide.com is about.