Leasing is a Form of Financing
Leasing is nothing more than a method of financing 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 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. Today, leasing accounts for 1 of every 3 new vehicles sold.
Since leasing is a form of financing and is not renting, customers’ credit scores are as important, if not more so, than buying with a loan. Get a Dark Web Scan and your Experian Credit Report for FREE!
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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 our LeaseGuide Car Deal Finder
. 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.
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.
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 or Honda Financial) 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. Once the contract is approved and you take delivery of the car, 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 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 or outside finance companies. Since the Great Recession of 2008-2010, hardly any banks still do leasing.
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 Payment Formula) based on the final price and non-negotiable factors, such as finance rate and fees, that are dictated by the leasing company. You may lower your monthly payment by making a cash down payment if you choose. Your payments 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 just as if you purchased the car. If the warranty is good for 3 years, and you lease for 3 years, your car will be covered for your entire lease term. It’s a good idea to not lease for a longer term than the warranty coverage period.
At the End of a 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 and “forgiving” of damages such as minor dents and scratches. Customers are expected to repair major damages prior to returning a vehicle at lease-end.
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.
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 complete details and instructions.
Summary
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. Continue by reading the next important chapter, Lease vs Buy?