Car Lease – the Basics

What is a car lease? In the simplest terms, it’s like renting a car – but for a really long time.
A lease is a contract that allows you (the lessee) to use something owned by another party (the lessor) for a specific amount of time. Leases can be used for an apartment, a piece of equipment, or a car. Unlike other types of leases, though, when you obtain a car lease an outside credit source actually buys the vehicle and then leases it to you. Your monthly payments will go to the lessor rather than to the dealership where you leased the car.
Most car leases only cover the cost of the vehicle; you’ll typically have to pay for maintenance, repairs, taxes, and insurance yourself.

There are two basic types of car leases: closed-end and open-end leases.

Closed-end leases give you the option of purchasing the vehicle at the end of the leasing period or to return it and walk away. Closed-end car leases are the most popular form of car lease. Most closed-end car leases set a residual value at the beginning of the lease – at the end of the lease term you can purchase the car for the residual value (or simply return it). Keep in mind, though, that some car leases state that you either pay the residual price or the fair market price – whichever is higher. If the price is too high you can simply walk away, of course.

Open-end car leases require you to buy the vehicle at the end of the leasing period. They tend to have lower monthly payments, but you’ll have to pay the pre-determined residual value at the end of the period. If the actual market value is higher than the residual value, you got a bargain – if it’s lower, you’ll still have to buy the car for the residual value. Due to the risks involved, in almost all cases you’re better off opting for a closed-end car lease even if the monthly payments are higher.

Many people feel that getting a car lease isn’t that different from buying a car. Because the monthly payments are often lower, it may seem that getting a car lease is a less expensive option than buying a car. In fact, leasing a car is very different from buying a car: the vehicle is owned by another party, and the other party can stipulate how many miles you can drive the car without penalty, and the condition it must be in at the end of the car lease. For instance, a car lease may state that you can put no more than 12,000 miles per year on the car; if you exceed that amount, you can pay amounts of $.40 per additional mile.

On the other hand, if you’d like to have a new car every two or three years, and you don’t put a lot of miles on your car, a car lease can make sense. If you can't afford the car payment without a sizeable down payment – but you don't have the sizeable down payment – leasing may make sense. If lower long-term costs are important to you, buying may make sense.

Here are some things to consider before you decide to lease a car:
• Don’t judge a car lease solely by the amount of the monthly payment. The monthly payment isn’t the only cost you’ll incur.
• If your car lease runs for the length of the manufacturer's warranty you'll never have to pay for major repairs.
• You can lease without a down payment, although making a down payment will lower your monthly payments.
• Terminating a car lease before the end of the lease period can be very expensive.
• Since you don't own a leased car, you can't change it, paint it, or add equipment to it.
• Choose a closed-end car lease. Read the fine print of the proposed car lease and make sure you understand all the terms.
• Putting more miles on the car than the car lease allows can cost you big money, since you'll pay so much per mile for every mile driven over the allowance.
• The best cars to lease are those with the best book value after the term of the car lease. Since they depreciate less, you pay less. You can look up lease ratings to see which cars retain their value better and will therefore give you the best lease deal. Stay away from cars which depreciate quickly… unless you're willing to pay more and can afford it.

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