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The Basics of Automobile Leasing
Automobile leasing
is paying for the use of the car, rather than paying
for the car itself. Monthly lease payments are based
on the projected cost of the vehicle’s depreciation
over the period covered by the lease.
There’s a shiny new Pontiac G6
parked in your next-door neighbor’s driveway. Standing
proudly next to it is a gleaming new Jeep Grand Cherokee.
This is the second time in four years that your neighbor
and his wife have driven home on brand-new sets of wheels.
Unless you live right next to state lottery winners
or an organized crime family, there could be a more
plausible explanation for your neighbors’ seemingly
good fortune: they might be leasing.
What is automotive leasing?
Automobile leasing is paying for the
use of the car, rather than paying for the car itself.
Monthly lease payments are based on the projected cost
of the vehicle’s depreciation over the period covered
by the lease. For instance, suppose you lease a car
valued at $20,000. Over the course of a three-year lease
term, let’s suppose the car depreciates in value
to $10,500. This depreciated value, also called the
vehicle’s residual value, is subtracted from the
car’s initial value. The difference between the
two values, in this case $9,500, is what you will be
paying for the duration of the lease. Leases typically
last for two four years, with leases on high-end vehicles
and luxury cars sometimes stretching up to five years.
When your lease expires, you have the option of either
buying the vehicle or moving on to a new lease.
What are the benefits and drawbacks
of leasing?
Monthly lease payments are generally
lower than monthly loan payments on the same vehicle,
assuming that the lease and the loan have the same duration.
Leasing lets you drive a new vehicle every few years
depending on the length of your lease. Additionally,
leasing allows you to drive a more expensive and feature-packed
vehicle for the same monthly payment you’d be making
to buy a lower-priced model. Your leased vehicle comes
with a warranty while it’s in your use. Furthermore,
automobile leasing saves you the trouble of selling
your used car or trading it in when you’re ready
to buy a new one. Moreover, you may also write off a
portion of your lease payments as a business expense
if you have a legitimate business use for the vehicle.
Ask a qualified accountant or tax professional about
the eligibility requirements for the tax write-off.
While leasing offers several benefits,
it also has its share of drawbacks. One disadvantage
is that vehicles on lease programs have annual mileage
limits, usually 15,000 miles per year. If you exceed
the mileage limit, you will be charged a predetermined
amount for every excess mile. Another drawback to leasing
is the slew of fees and charges that you will have to
pay at the beginning and end of the lease. Among these
additional fees are the lease acquisition fee, the lease
disposal fee, and the lease finance charge. There are
also extra charges for extended warranties, insurance
coverage, and other items. Furthermore, if you terminate
the lease before the lease period is over, you will
be assessed an early termination penalty. Another disadvantage
to leasing is that you will have to return the vehicle
when the lease expires, unless you choose to purchase
the vehicle at lease-end.
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