Auto Lease

An auto lease is a financial agreement that allows a person to acquire and use a vehicle, like a car, SUV, or a motorcycle, without having to purchase it for the full price. Typically, the vehicle may be used during a period of two to five years and has to be returned at the end of it. In many cases, though, renters offer customers the option to buy the vehicle, but that’s not obligatory for every auto lease.

How Does An Auto Lease Work?

In many ways, an auto lease is similar to an apartment lease. When a person decides to rent an apartment, they make an arrangement with the owner to live there and use it for a certain period without owning it outright. At the end of the agreed period, they can move out to a different place, or make a renewed arrangement which will allow them to stay for longer.

The same goes for an auto lease. You rent a vehicle, have access to it, and use it as you wish, but it’s not your property. When your lease term ends, you must return the vehicle you rented, and get a new lease if you decide to rent a car or motorcycle again.

When you get an auto lease, you have to check for terms and conditions of use. There are some set amounts of mileage and wear that you are allowed to make during the time you use a vehicle, but crossing that line carries penalties. When your lease is up, you may be required to cover for additional fees for the damage inflicted on the car on top of the regular monthly bill.

Owning a car may sound like a preferable option, and it may very well be one, depending on a person’s situation. However, not having it as your property carries certain advantages, too. Contrary to what happens with houses, a car often decreases in value as it ages. If a person purchases a home, they can expect it to increase in value in a couple of years, and then sell it to get more money. A car, on the other hand, depreciates in time, meaning its worth is smaller compared to the original price.

Buying a car outright has its perks, too. Manageable as renting is, in the long run, it ends up being more expensive than purchasing the vehicle in the first place. If the situation allows it, usually it’s best to buy a car, but getting an auto lease is a great option for those who need access to a car but prioritize something else, like improving their credit, or taking care of some debt. As such, leases are available to a broader range of people.

Benefits of auto leasing:

  • Access to newer models that you may not be able to afford when buying.
  • The process is straightforward and easy to understand.
  • The monthly payments are affordable, as they don’t include interest rates or additional fees.

Drawbacks of auto leasing:

  • Access to newer models that you may not be able to afford when buying.
  • The process is straightforward and easy to understand.
  • The monthly payments are affordable, as they don’t include interest rates or additional fees.

Should I take out an Auto Lease or Auto Loan?

Although you may be confused due to similar names, these two terms are very different. As you’ve learned, when you take a lease, you’re not borrowing money. Simply put, you are using somebody else’s property, whether it’s a house or a vehicle, and paying for it on a monthly basis until an agreed period is over.

When you take an auto loan, you are borrowing money to buy a vehicle outright, and then have to repay the entire sum you borrowed in a predetermined time window, with an important addition of interest rates.

Although most auto loans are secured, it’s possible to take an unsecured loan to buy a car. If your loan is secured, the vehicle you buy counts as collateral. That means, if you can’t pay back the money in time and your loan goes into default, the lender is entitled to your vehicle as a means to cover for the loss. In an unsecured loan, collateral isn’t included, but the interest rates are typically higher as the investment is considered riskier for the loaner.

Depending on the arrangement you make, the interest rates are usually on the lower end, and the sum can be paid month by month instead of at once, allowing you to calculate your expenses timely. Interest rates are included in your fixed bill, and you don’t have to worry about some overlooked fee surprising you down the road.

Taking a lease may be less costly overall, but at the end of the term, you don’t own the car. Renting a vehicle doesn’t change your net worth, but owning one increases it – perhaps another thing to consider when deciding whether to rent or buy.

Auto Leasing Terminology

If you’re new to the idea of leasing, you may encounter some phrases that seem intimidating at first. Here’s a little breakdown to help you navigate through the process:

Capitalization cost – the assessed worth of the vehicle which the owner uses to determine how much they will charge for renting it.

Cap cost reduction – the amount you pay when you first sign a lease. If this sum is larger, the monthly payments will typically be smaller, and vice versa.

Disposition fee – what you need to pay when your term is up if the condition of the vehicle doesn’t pass the criteria you’ve agreed to when you signed the lease.

Residual value – how much the worth of a vehicle will decrease over time, usually assessed in percentages.

Closed-end lease – a lease that includes the car’s residual worth, and doesn’t require additional payments should the car’s worth decrease by the end of the term.

Early termination fee – the usually chunky amount that you need to pay if you want to stop renting the vehicle before the end of the term, especially in the first half of it.