How Car Leasing Works

| January 11, 2013

car leasing explained You found some new car dealers on DexKnows and started looking at the latest models. Now sticker shock is sinking in. New cars are expensive! In fact, as reported in the Wall Street Journal, the average price of a new car in August 2012 was more than $30,000. Not many people have that kind of money sitting around, so almost everyone finances their new car. There are two ways of doing this: take out a loan or arrange a lease. A loan can be a good choice if you’re able to make a large down payment, but if not, leasing will probably result in lower monthly payouts. Let’s take a look at how it works.

It’s like renting an apartment

If you borrow money to buy a car, you own it. Admittedly, the lender may have a claim on it if you don’t make the repayments, but once the loan is paid off, the car is yours. When you lease, you don’t own the car. It belongs to a finance company that lets you use it in exchange for a monthly fee. You can think of it as renting. And like renting anything else, when you’re done, it goes back to the owner.

Leasing reduces the monthly payment

Most car leases are for 36 months, although longer and shorter terms are sometimes offered. At the end of that period, the lease company can sell the car for around 50 to 60 percent of its price when it was new. Your monthly lease payments cover the difference, meaning that rather than pay for the whole car, you’ve paid for less than half of it.

But arriving at the monthly payment figure isn’t as simple as dividing the depreciation by 36. You still have to pay the finance company for the use of their money, which means there’s interest to be added on. has a monthly payment calculator that takes into account items such as interest and sales tax, and it has a lot more information on leasing.

There are restrictions

Because the way you use and look after a vehicle has a big impact on its value, lease companies limit the mileage that can be covered and insist that it is returned in good condition. You agree to the mileage limit when you sign the lease agreement. Typically, this will be between 10,000 and 15,000 miles per year (more miles means a higher monthly charge), and if you exceed the limit, you’ll be charged $0.20 to $0.35 per mile over the limit.

You’ll also be charged for any damage beyond what’s considered normal wear and tear. As a guide, torn or stained upholstery, a cracked windshield or damaged bodywork would all incur a repair charge.

Who is leasing good for?

If you want the benefits of a new car, you don’t drive far and you like to look after your ride but don’t have much money to put down, leasing can be a good option. Just remember that at the end of lease, the car has to be returned. There can also be some tax benefits, especially if you run your own business; consult a tax expert for more information. On the other hand, if you want something to show for all those monthly payments and you intend to keep the car a long time, you’ll want to buy.

Next steps

To learn more about leasing, check out the Federal Trade Commission‘s website. There’s also an excellent downloadable guide on the New Jersey Department of Consumer Affairs website. And once you’ve educated yourself about car leasing, it’s time to find those car dealers on the DexKnows site.

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Category: Auto Leasing, Autos

About the Author ()

After twenty years in the automobile industry the craft of wordsmith called. Putting down the wrench, Nigel picked up a keyboard on which to express his passion for all things automotive.