The Reason Car Leasing is Not Well Understood
Leasing is a very popular alternative to buying a car with a loan, but even those who do it often don’t understand it. Others avoid it because they have misconceptions or feel it’s some kind of dealer trick that will get them in trouble.
The basic reason that leasing is often misunderstood boils down to one factor — it’s more complicated and different than other types of common financial transactions that consumers are familiar with.
Car leasing is sometimes, mistakenly, compared to apartment leasing. It’s unfortunate that the term “leasing” is used in both cases. Although the two types of leasing seem similar on the surface, they are in fact quite different. Apartment leasing is a form of renting while car leasing is a form of financing, similar to a loan.
Loans and leases are not that much different
When you buy a car with a loan from a bank or finance company, that bank (or finance company) pays the dealer for the car — on your behalf with the money you borrowed. The bank essentially owns the car until the loan is repaid, meaning they have a primary legal right to it as long as the loan exists. You can keep the car until the loan has been paid off, or you can sell/trade it and use the proceeds to help pay off the loan.
Leasing is basically not so different. A bank or lease finance company pays the dealer for the car, which makes them the owner. The company loans you the car, not money. You agree to pay for the loss (depreciation) of value of that car while you drive it. At lease-end, you can simply return the car, or purchase it for the remaining part of the car’s value that you haven’t already paid.
So how is leasing more complicated and different?
First, the language of leasing is a bit strange to most people. Terms like “capitalized cost” (the amount financed), “capitalized cost reduction” (down payment), and “money factor” (finance rate) can make leasing a bit frightening to some.
Next, there are several fees that are unusual. There’s an “acquisition fee” which is an administrative fee paid up front. And a “disposition fee” at the end.
Since lease payments are established in the beginning on expected value depreciation over the life of a lease, the vehicle is therefore predicted to have a certain amount of its original value left at the end — the “residual” value — based on a specific number of miles that the vehicle is expected to be driven. Expected residual value also assumes the vehicle will be in good, undamaged condition at lease-end.
If a leasing customer exceeds the planned amount of miles, or causes excessive wear or damage, other costs will occur to account for the additional loss of value of the vehicle to the leasing company.
Leasing also requires that the first month’s payment be made at the beginning of the lease, not the end of the month as with a loan. In this sense, you pay “ahead” instead of “behind.”
Is leasing a scam or dealer trick?
Not at all. It’s a common form of financing. However, because it’s more complicated and more difficult to understand than buying with a loan, it’s much easier to make mistakes.
Dealers do what dealers do — they are in business to make money and if that means taking advantage of customer’s ignorance or misunderstandings, they’ll do it whether it’s buying or leasing.
This means leasing requires more knowledge, preparation, and care to avoid making mistakes and to get a great deal.
If you use the resources and tools here on the LeaseGuide.com web site, you should have no more fear or problems with leasing than with any other way of acquiring a new car.