By Jon Acuff
Why lease a car?
The simple answer is "Leases offer lower monthly payments on higher quality cars." In many cases a lease allows you to make lower monthly payments on cars that might normally be out of your price range. There are several things to look at when you consider leasing — the benefits, mechanics and potential complications of a lease.
What is a lease?
In the simplest terms, a lease is similar to renting a car for a longer term. It is a financing agreement in which you promise to pay any upfront costs, make monthly payments and maintain a car over a fixed period of time.
At the end of the lease period, you return the car. If you drove further than what was stipulated at the start of the lease,
the leasing company will usually charge you an additional per-mile fee. If there is excessive wear and tear, you'll be required
to repair the damage. Or, you'll typically have the option to purchase the car at the end of the lease for a price determined
at the beginning of the lease.
How does a lease work?
Lease payments are based on a number of factors. Payments reflect
For instance, let's say you're looking at a sports car and an SUV. Each one is selling for $30,000, which represents the current value of the vehicles. The leasing company projects that after three years, the SUV should be worth $22,000, and the sports car should be worth $18,000. In this case, it would cost less to lease the SUV because it will be worth more to the leasing company at the end of the lease. Although they both started out with the same initial price, the SUV is expected to maintain a higher residual value and therefore will depreciate less than the sports car. Lower depreciation equals a lower lease payment. Think of the depreciation amount as the "cost" of the "rental."
The easiest way to see the math behind a lease is to use our Purchase vs. Lease Calculator. You'll get an instant look at the differences between these two popular financing methods.
Is a lease a good choice for you?
To determine whether a lease might work for you, take a look at the benefits of leasing.