What is car leasing?
Key terms you should know.
Lessee – The party leasing the vehicle.
Lessor – The entity providing the lease.
Term – How long the lease will last.
Drive-off Fees/Out of pocket cost – These are the fees that you pay when you sign the lease. These may include but are not limited to any down payments, first month and taxes. Make sure to ask what the out of pocket costs are for as they may be be negotiable.
Acquisition Fee – This is the administrative/document fee charged by the dealer for setting up the lease. This fee is none negotiable and can be up to $1000. Though this fee can not be negotiated, it can be rolled into your monthly payment to avoid paying a larger out of pocket cost.
Money Factor – A different way of showing your monthly interest rate. To show it as a percentage, multiply the money factor by 2400.
Allowable Mileage – The average amount of miles per year allowed.
Capitalized Cost – Agreed upon selling price plus fees.
Capitalized cost reduction – Any incentive or down payment that reduces the capitalized cost.
Depreciation – The monitory value lost of the vehicle during the duration off the lease.
Disposition Fee – This is a fee charged by the bank to clean and return the vehicle.
Early termination – Breaking the lease agreement and returning the vehicle before the term is up.
Gap Insurance – Some insurances do not cover the entire cost of the car in the event of a total lose accident or theft. Gap insurance covers the difference.
Payoff amount – The amount it will cost to buy the vehicle at the end of the lease.
What is car leasing?
Leasing a car is a lot like renting an apartment or house. You agree to pay a monthly fee to drive the vehicle for a certain period of time but in the end, you do not own it. Unlike buying a car from a dealership, when the lease term is up you either return the car to the dealership or you have the option of buying it out. In other words, leasing a car is essentially renting a car from dealership for a certain period of time.
Your specific lease agreement will take several factors into account to detrain your monthly payment. The amount of time you are leasing the car for, the coast of the vehicle you are leasing, the amount of miles you plan on driving per year, and your credit score.
How long is a car lease?
Standard car lease terms are two to five years long. There are special 18 month lease terms but those are few and far between. Typically, you will find lease offers with 24 to 36 month term lengths with 36 months being the most common term length. Longer leases usually come with a lower monthly payment. However, you do not want to commit to a period of time that does not make sense to you. If you decide that you can no longer keep the car or circumstances change and find yourself needing to exit your lease, there are options for doing so but it can incur a significate cost.
What is millage allowance?
What is millage allowance?
A lease agreement comes with a certain number of miles allowed per year. The standard options are 7,500 miles, 10,000 miles and 15,000 miles per year. The number of miles per year you choose effects your monthly payment. The more miles, the higher your monthly payment will be.
What are the requirement for a car lease?
What are the requirement for a car lease?
The requirements are simple.
A good credit score
Proof of Consistent Income
Proof of insurance
Valid Driver’s license
Why is good credit important?
A good credit score will help you qualify and secure a better monthly payment. Taking a lease is a lot like taking a loan. The bank or credit union is letting you borrow the car for a certain period of time and expects a certain monetary value in return. They need to know that you’re a safe bet for them. Also, even though you do not own the car, the lender reports your monthly payments to the credit bureaus. This means that missing payments or not paying on time will affect your credit score. Likewise, if your credit is not great, like with a loan, that will affect your monthly payment and often time if they do approve you it results in higher monthly payments.
Proof of income
Like with a loan, lenders require proof of income to make sure that you have the ability to pay for the car you are leasing. The minimum income requirements vary based on the lender, lease and/or vehicle purchase price. You can provide proof of income by providing pay stubs or tax returns.
Proof of insurance
To lease a car, you must obtain and provide insurance for the vehicle before leasing it. Remember, you do not own it. The bank does. You must provide full coverage insurance. In other words, you must provide insurance covering the entire cost of the vehicle. Each lease agreement also states that the insurance must be active and valid throughout the entire duration of the lease term. Otherwise, the lender can void your agreement and take the vehicle back.
Valid Drivers License
All leasing contracts require you to have a valid driver’s license. Make sure that all your information is up to date and matches the information on your credit application.
What are the benefits leasing a car?
What are the benefits leasing a car?
Leasing a car is great way to drive something new every few years with minimal headaches, minimal maintenance cost and often times lower monthly payments when compared to buying a car. Here are some of the benefits of leasing:
Maintenance
When leasing a car, most of the time the only thing you are responsible for is regular maintenance (i.e. oil changes and fluid top ups) and of anything happens your tires, tire repairs or replacements. If something major happens to the car, it is typically covered under the bumper to bumper warranty. This means you always have a working car and don’t have to worry about the cost associated with maintaining it.
Ability to drive something new every few years
A car lease is usually 36 months. This means every 3 years you get to choose a new car to drive. This comes with added benefits of having the latest features and technologies. Every year more and more features become standard on all vehicles. This means that what you once had to pay for is now included. Because of this you might have to choose not add additional options to get what you want resulting in a lower monthly payment.
Perfect for short-term living
If you know you do not plan on living in a certain city for longer than a few years but you still need a car, leasing is perfect for you. You have a car for as long as you need it and or are living in that city and when you are done you return it and move on to the next.
Ability to buy the car after your lease is over
If you really like the car you are driving you always the ability to car after the lease is over. All those monthly payments go towards the estimated depreciation cost of the vehicle and now the purchase price of the car is significantly lower than what it was new.
What are the cons of leasing a car?
What are the cons of leasing a car?
Leasing a car comes with great benefits but it also has its draw backs. Here are the major draw backs of leasing a car.
If something were to happen to car cosmetically or damages accrued that are outside the scope of the warranty, you are responsible for those costs. For example if you if you got into a fender bender, either you or your insurance would have to cover the cost of repair resulting in a large out of pocket cost or your insurance rate going up. Additionally, if something were to happen mechanically to your vehicle such a wire being chewed by a rodent or your engine was damaged due to neglecting regular maintenance, you again would be responsible for the repairs because the damages were not caused by an issue in the engineering or manufacturing of the vehicle. In other words if the damages were caused by someone or something, you are responsible for the cost of repair.
Every lease comes with a set number of miles allowed per year. If you exceed the cumulative total of at the end of the lease term, you will have to pay a penalty for every mile over the limit you drove.
If for any reason you need to terminated your lease early, you will be hit with a large penalty. In most cases the penalty will be one large some equating to the amount of all outstanding payments. Please read how to terminate my lease early for more details and options.
Finally, leasing a car is essentially paying for something that is not yours. At the end of your term, you do not get to keep the car. A car loses a significant portion of its value during the first three years and all the payments you have made do not go towards building equity in the car. You will have the option of buying the car at the end of your lease term but make sure to do market research before you do so. A lot of the time, your buy out will be more then what the market value of the car is. The main benefit of buying out your lease, is you know exactly how the car was driven, used and maintained through out the entirety of its existence.
