Definition of Car Leasing

by Ben Bontekoe

If you are in the market for a new car, you may be considering the common question of whether to buy or lease. There are pros and cons to each, but dealers often present leasing as the better choice. This may be true in your situation, but you should know the total amount your lease will cost, as well as think about how you plan to use the vehicle, before deciding to lease your next car.

The Facts

Leasing a car can seem like an attractive option because your monthly payments are generally much lower than if you buy. Also, at the end of the lease, you may choose to purchase the car, or you can simply return it to the dealer with no further commitment (after paying any applicable fees). Basically, leasing allows you to drive a new car every few years, which can save substantially in repairs and maintenance.

Function

Lease payments are so much cheaper than loan payments because you are essentially "renting" the vehicle. Lease payments go toward covering the car's depreciation during the period you are driving it, along with its taxes and other fees. Loan payments, on the other hand, are paying the car's entire purchase price, along with interest charges, fees and taxes. You may choose to lease if you need the lower payment or if you simply prefer to drive newer cars with up-to-date features.

Benefits

If you decide to return the car at the end of the lease, you do not have to worry about it any longer---it is the dealer's responsibility to figure out how to resell it, which is especially useful if the vehicle has declined greatly in value. Because of the many variables that go into calculating a lease payment, the dealer has great flexibility in arranging a lease payment you can afford. However, you may have to put more money down or agree to a longer lease term.

Considerations

Pay attention to all of the costs associated with a lease. For example, you will often have to make a down payment (usually called a capitalized cost reduction), as well as one or more months' worth of payments, a security deposit, taxes and dealer fees, before you are allowed to drive the car off the lot. Also remember that you will be responsible for any maintenance costs and insurance, which is often higher than on a financed vehicle.

Warning

Your lease will likely specify how many miles you can drive (usually 10,000 to 15,000 per year). If you go over the mileage, you will pay an excess mileage fee. At a rate of several cents per mile, it can add up quickly if you are significantly over the mileage limit. Your lease will likely permit ordinary wear and tear; be aware that your vehicle will be checked closely for any additional damage, for which you will be charged.

About the Author

Ben Bontekoe is a published writer with an extensive background in personal finance, banking, career counseling and education. A graduate of Calvin College, he has worked for major financial institutions including Bank of America and Citibank.