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:
The vehicle is titled to your leasing source throughout
the terms of the lease. You have two options after your lease term expires:
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
- Turn the vehicle in and walk away
- 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.
Leasing may not be the best alternative for you because of the following reasons:
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.
- 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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