How Does a Car Lease Work?

According to one of the latest Lease Market Reports from Edmunds, automotive leases achieved an all-time record level in 2016 with 4.3 million vehicles. Over the past five years, car lease volumes skyrocketed by 91% and accounted for 31% of all new vehicle sales in 2016.

Even though leasing has exponentially grown in popularity due to favorable benefits like lower monthly payments, lower taxation, and the countless other perks; do you actually understand how car leasing works? If not, use the following information to gain insight on why fewer people are purchasing cars, while millions of informed Americans are choosing to lease.

Overview of Car Leasing

The simplest way to describe leasing a car is to say it’s like renting a vehicle. However, this simple description can be very misleading. In reality, leasing a vehicle is a flexible and innovative mode of vehicle ownership. Unlike a traditional car loan where you pay the entire price of the vehicle, leasing a car only requires you to pay for the portion of the vehicle you use — along with financing costs.

With a lease, you’re allotted a certain number of miles based on your driving habits. You make monthly payments throughout the agreed-upon term of the lease — 24 months, 36 months, 46 months, etc. When the lease ends, you’ll have the option to return the vehicle or purchase the vehicle at a predetermined residual value.

Common Car Lease Terminology

When you lease a vehicle, you’ll hear terms like residual value, capitalization cost, and money factor. While these terms were previously explained, a few additional common car leasing terms include:

• Capitalized Cost Reduction is similar to a down payment and can decrease the capitalization cost of your lease. While down payments are not required on most leases, capitalized cost reduction can make your payments lower and be especially helpful for bad credit leasing.
• Trade-in Credit represents the value of your trade-in vehicle used to reduce your monthly payments. Trade-in credits work similarly to capitalized cost reduction.
• Security Deposits are usually fully-refundable payments that can be equivalent to a single month’s lease payment. Security deposits can be used to reduce your overall money factor, lower your monthly payment, improve your creditworthiness, and increase your savings. Most leases allow you to make up to seven security deposits.
• Lease Inception Costs, Get-In Fees, or Drive-Off Fees refer to the fees required to start your leases, such as title fees, taxes, acquisition fees, and others.
• Early Termination Charge represents the fees associated with ending your lease early.
• Excess Mileage Adjustments are the fees you may have to pay if you exceed your mileage agreement.

How Are Monthly Lease Payments Determined?

With traditional auto financing, each month your payment goes towards the principle on the vehicle and finance charges determined by the interest rate. However, auto leases have lower monthly payments because you’re only paying for the part of the vehicle you use. Your monthly lease payment is primarily based on two factors: the cost of use or depreciation and the money factor or finance charge.

Depreciation

Just as with any vehicle, your leased car depreciates in value as you accumulate more miles and the vehicle experiences normal wear and tear. To account for the loss in value, your leasing company requires a portion of your monthly payment to be directed towards depreciation. Ultimately, your monthly payment will be largely based on:

• The difference between the vehicle’s value at the start of the lease (capitalization cost), and
• The value the leasing company expects the vehicle to be worth at the end of the lease (residual value).

Capitalization Cost of Your Lease

When you purchase a vehicle, you will pay the sticker price or purchase price of the vehicle over a set number of years. However, leases have a capitalization cost representing the value of the vehicle at the beginning of the lease in addition to any extra fees, taxes, etc.

Similar to the sticker price or purchase price of a financed vehicle, the capitalization cost is the amount you’ll pay for the use of the leased vehicle. Generally, the lower the capitalization cost of your lease vehicle, the lower your monthly payments.

Residual Value of Your Lease

The residual value of your lease is a fancy way of explaining how much the leasing company expects the vehicle to be worth at the end of the lease. Your residual value is based on the number of miles you agree to drive each year — such as 10,000, 12,000, or 15,000 — and the term of the lease.

At the end of your lease, you’ll have the option to buy the vehicle at the residual value — regardless of what the vehicle is valued on the open market at the time. This simple lease-to-buy option means you’ll know the resale value of your vehicle from the beginning and can potentially purchase a vehicle below market value or simply walk away.

It’s important to understand the higher your residual value, the lower your monthly payments. For this very reason, a growing number of people are choosing to lease a car — instead of purchasing the same vehicle and paying much more.

Money Factor

The other component determining your lease payment is the money factor. While traditional vehicle financing includes an interest rate representing the risk the lender takes for loaning you money to purchase the vehicle; leases include a money factor, which is not the same as an interest rate.

The lease money factor represents the compensation you pay to the leasing company for the risk they take by trusting you’ll make all lease payments on time. Money factors are not expressed in annual percentage rates (APR). In contrast, money factors are written as long decimals. Although it may seem confusing, converting your money factor into APR is simple — just multiply the money factor by 2,400.

Simple Steps to Leasing Your Dream Vehicle

Whether you’re considering the unbridled allure of a Bentley, the prestige of an Aston Martin, the reliability of an Acura, or any other make or model; Carlease.com makes leasing your dream vehicle as simple as possible. Best of all, if you’ve read this post, you would’ve already completed the first step — getting acquainted with leasing. The next steps are simple:

1. Explore and configure your vehicle.
2. Choose “Get Lease Payment” for an estimate of your monthly payment.
3. Enter your personal information, desired terms, and any trade-in vehicle information.
4. Wait for a CarLease.com salesperson to reach out to you to discuss the details

With Carlease.com, you never have to set foot on a dealership’s lot. There are no high-pressure sales tactics or back and forth bargaining. Carlease.com provides a white-glove, concierge service where your dream lease vehicle is delivered to your doorstep or to your business. The process couldn’t be easier.

Are you on the fence about the buying a car versus car leasing? Carlease.com makes it easy for you to understand your options and make the most intelligent decision. 

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