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Automobile leasing originally was designed for businesses, who wanted a fleet of vehicles for corporate use and did not want to freeze up large amounts of money by  owning the cars. Today, leasing is a popular option for consumers also, because you get the use of a vehicle with lower monthly payments. There are two types of leases to consider: Close-end and Open-end.

Consider opting for a close-end lease for the following reason:

  • Close-end leases set a non-negotiable residual value to the vehicle and spell out all conditions in the lease. On the other hand, Open-end leases do not determine a residual value upfront; it waits until the lease expires and you eat the difference between the selling price and fair market value. (Residual value is a predetermined selling value after the lease has expired).

How Leasing Agreements Work

Simply, a lease can be compared to renting a car for the weekend. Like renting, a lease is restrictive on the mileage you drive. Additionally, you lose the total freedom of owning the vehicle because you are bound by your leasing agreement. You can review sample lease agreements under consumer protection at FTC. A typical leasing agreement will contain these elements: 
  •  Contract terms can vary from 12 to 84 months. You pay for the value of the vehicle used during your specified term agreement.

  • Lease payments are determined by taking ( the price of the vehicle{-} its residual value at the end of the lease).

  •  Their is a pre- set amount of maximum miles you agree the car will have when you turn it in. Also, you will pay charges for any damage incurred, which are beyond normal wear & tear (ask your leasing company for a guideline book for damages). Any conditions of your leasing agreement that are not kept, will result in lease-end charges.

The vehicle is titled to your leasing source throughout the terms of the lease. You have two options after your lease term expires:

  1. Turn the vehicle in and walk away
  2. Purchase the leased vehicle at its purchase option price.
Benefits and Disadvantages
Leasing may be your best purchasing decision based on these benefits:
  • Lower cash requirements- Generally with a lease there is no down payment required. You are responsible for a security deposit and the first monthly payment. Also, you are only paying for the value of the vehicle over the lease term, which is a cost savings compared to paying for the full value of the car.
  • Ability to stay in newer models- With a lease, you can drive the latest model every three years or whenever your lease expires. For example, if you lease a Ford Explorer in 2003 and sign a 36 month lease, you can choose to lease a new 2006 after the term expires. Where as with a purchase, it may take you six years before you can pay off a vehicle.

  • Affordability- Leasing allows you to drive a more expensive car for less of a payment as compared to financing. Because you are only paying for the duration of the term, a more expensive car becomes more affordable.

  • Lease end options- As stated previously, you can walk away from a lease after you have satisfied your agreement or buy the leased car outright at its present market value.

Leasing may not be the best alternative for you because of the following reasons:
  • Ownership- Lack of ownership and restrictions on use including mileage driven per year.
  • Asset Return- Payments made with 'nothing to show for it' after the lease term expires if you do not choose the purchase option.
  • Unexpected Charges-Additional charges owed at the end of the lease due to dents and minor damage not covered under wear & use guidelines will increase your total cost.

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