Many people consider leasing a car than buying it on one off terms and owning it fully. However, not many of them understand the real meaning of leasing and what it takes to enter into a lease, and more importantly, how it will cost them financially. The deal may be enticing, but the calculation of what you have to give to the lessee is what should be central to your consideration.
To decide whether or not to lease your new car, it’s important to understand how the financial mechanics of leasing compare with a loan. In some ways, leasing is just like taking out a loan. When you lease, you borrow the entire value of the car (minus any trade-in or down payment). For example, when you drive away in a $36,000 leased vehicle, you’re immediately tying up the entire $36,000 that the finance company gave the dealership, the same as if you had bought the car with a loan. And just as with a loan, you’ll be charged monthly interest on that amount, minus whatever you pay back along the way.
And it’s the amount you pay back that’s the biggest difference between a lease and a loan.
With a loan, your payments are based on the entire cost of the vehicle. For a 36-month loan on that $36,000 car, for example, the principal portion of the payment averages $1,000 a month. But with a lease, you pay back only the vehicle’s decline in value—the depreciation—while you’re using it.
Since that $36,000 vehicle might depreciate about $18,000 over that same 36 months, the principal portion of the monthly lease payment would be based on $500, about half as much as for the loan. Of course, at the end of the lease, you have to return the car (unless you come up with the remaining $18,000 of the residual value to buy it).
Entering into a leasing contract may be the better way for you. But getting the facts right on the downside of leasing should be the first thing to consider. There are a number of things you should make sure that you get right when it comes to charges on such issues as exceeded mileage and insurance cover.
Personal Contract Hire
Penalties for going over your agreed mileage limit can be expensive. You will also never actually own your car as there is no option to buy it at the end of the agreement. And because you don’t own it, you will always have to take out fully.
Personal Contract Purchase
Overall, PCP is more expensive than personal contract hire and again, if you go over your mileage limit, the penalties can be costly. Similarly, if you decide to get out of your contract early, you could be charged heavily.
Again, as you don’t own the car, you will have to take out fully comprehensive car insurance.
If you fall behind with your payments, your car can be repossessed. You are also liable for any damage to the car.
Interest rates on hire purchase agreements can be high, so compare deals carefully. And watch out for an ‘option to purchase’ fee which can be thrown in at the end of the contract.
You always have the opportunity to discuss matters on leasing; you may have to settle to the reality that there are some things you will not be able to negotiate on the deal. There are some elements that determine your pre-tax monthly payment, most of which are dependent on the decision of your lessee.
The leasing company (NOT the dealer) determines the residual value, so it can calculate how much to charge for depreciation. The reference “bible” leasing companies use to establish this value is the Automotive Lease Guide’s “Residual Percentage Guide,” which is published every two months, listing projected wholesale values of vehicles after 2, 3, 4 and 5 years. Residuals are stated there as a percentage of a vehicle’s original retail/sticker price (MSRP). They are realistic estimates of the price leasing entities will realize when they auction the leased vehicle to dealers selling that nameplate. (We subscribe to that Automotive Lease Guide publication.
The leasing company also determines the interest rate, or “money factor.” Lessees with the highest credit scores typically get the best rates, just as they do when they are buying. If the rate is at or near the going retail market interest rate for car loans, chances are the dealer will earn some profit on it. But if it’s a factory-subsidized lease through an automaker’s captive finance company with a money factor/interest rate well below the market rate, there’s usually no money in that for the dealer. in that instance, the automaker is charging you a lower rate then it’s paying for the money, using some of the profit it made selling the car to the dealer to cover that cost.
Sourced From: http://www.fightingchance.com/auto_leasing.php