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 true 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 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 the vehicle again.
When you get an auto lease, it’s always smart to check the terms and conditions of use. There may be set mileage limits or wear-and-tear rules that would lead to additional charges if broken. When your lease is up, you may be required to cover for any additional fees for the damage inflicted on the car on top of the regular monthly bill.
Owning a car may seem like a preferable option but it depends on each customer’s specific situation. Not owning the vehicle carries certain advantages as well. Contrary to what happens with homes, a car often decreases in value as it ages. While homes can sometimes increase in value over time, vehicles are a depreciating investment, meaning they lose value over time.
Buying a car outright has its perks though. As manageable as leasing might be, in the long run it can end up being more expensive than purchasing. It all really depends on your specific situation, and which option is best suited for you.
Benefits of auto leasing:
- Access to newer models that you may not be able to afford when buying.
- The process is usually straightforward and easy to understand.
- The monthly payments are affordable, as they don’t include interest rates or additional fees.
Drawbacks of auto leasing:
- There’s a limited mileage you can put on the car without paying extra.
- Making monthly payments on a vehicle you don’t own.
- Responsibility for the state of the car.
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 the addition of interest.
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 allowed to take 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 lender.
Depending on the arrangement you make, the interest rates for auto loans can be fairly low, and the sum can be paid month by month instead of all at once, allowing you to manage your expenses payments. Interest rates are included in your fixed bill, so you shouldn’t have to worry about hidden fees.
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 the leasing 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 large, 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 amount that you need to pay if you want to stop leasing the vehicle before the end of the term.
If you’re considering paying in full for a car, or even looking for a couple of extra bucks to cover your next payment, CreditNinja can help. Start an application today, and see how much you might be eligible for.