Do You Know What Leasing A Car Really Means?

At some point in your financial journey, you will have heard of leasing a car. Whether you’ve been talked into one by an auto dealer or talked out of one by a financial guru, it’s important to understand what you’re dealing with when it comes to auto lending. In a previous post, we covered auto loans and their pros and cons. In this post, we’ll cover the ins and outs of a lease. We will break down some of the key items so you can be better informed next time you go look at cars.

The Rate

Essentially, a vehicle lease is an extended rental of a new car. You can borrow a car from the leasing company for monthly payments. They are offered in the same terms as auto loans, 24, 36, 48, and 60 months. They also are similar to auto loans in the sense they have a charged “money factor”, similar to an interest rate. Where they differ from auto loans, however, is that you are borrowing the vehicle from a leasing company, and the monthly payments are much lower than a purchased loan would be. This is because, for a lease, you are only paying for the portion of the car that you use, instead of paying to own the vehicle outright.

Sounds Good Right?

Due to the lower payments, many people will choose to lease a car. It can be very enticing to drive a brand new car, for a relatively low payment. However, the best option for financial success is to purchase a pre-owned vehicle with cash. Something reliable, without payments, will set you up for financial freedom later on down the line. For more information about how to get to this point in your finances, check out our post on paying off debt here.

The Payments

Another big difference you are going to need to understand is the biggest difference between a lease and a traditional loan for a vehicle. This is of course how the payments are applied to a leased vehicle.  With a traditional loan, the payments are being applied to both the principle and the interest rate accrued on the car. On a leased car, the payments are being applied to the “Use” of the car, no principle is ever being applied to the actual car itself.

Always Read the Fine Print

Unfortunately, the information you might have received prior to actually getting to the documents to sign for the lease might not be the same. Much of what you will discover are many small fees within the fine print which add expense to the cost of the lease. For example, one of the small items we have seen was the additional costs if the owner exceeded a certain number of miles on the vehicle by the end of the lease life. Then, for any mile after the maximum allowed, there would be a fee. There are other restrictions such as this which might impact you depending on your unique situation.

Closing Comments

Please keep in mind, some people have made a lifestyle of leasing for a few years and upgrading to the newest model when their lease is done.  This can be done, it is just not always to most cost-efficient. For many of us though, a lease will not work. If you are still not sure what a lease is or if you are still considering signing one, let me relate it to a different topic. Would you rather buy a house and put money into equity (adding value to the home), or would you rather lease/rent an apartment and pay towards the “Use” of the temporary home? It is a tough decision I know. However, if you have the ability to own (even if you own through a traditional loan), you will at least have something to show of value at the end of the term.