What does it mean to lease a car? This question will undoubtedly run through your mind if you’re considering leasing or buying a new car. Generally, leasing is an excellent option for those who want to drive new cars without incurring the considerable initial cost of purchasing a car. With this arrangement, you can drive the car you want without incurring the costs associated with ownership. When the lease period ends, you’ll need to return the car to the dealer.
Is it Safe to Lease a Car?
You’ve probably been told severally that leasing is never a good idea and that buying outright makes more sense. Well, that isn’t always the case because it depends on your situation. Like any other major decision you’ve made, leasing a car has several pros and cons. Leases account for nearly 20% of new car transactions.
Therefore, it’s clear to see that many people love driving around in new cars without incurring the financial obligation of making an outright purchase. The decision to lease or buy a car depends on several factors, including how much you intend to drive and how much money you have. That said, here are the pros and cons of car leasing.
- You have access to a new car whenever you want. The best part is that you won’t have to incur the purchase cost.
- There are fewer maintenance issues to deal with, since leased cars tend to be newer. For someone who leads a busy life, it means you have less stress to handle.
- Leases are considered tax-deductible expenses. If you lease a car for your small business, you can write off the lease as a company expense, saving money in the long run.
- Leasing allows you to drive any car you want with fewer upfront costs. Besides the purchase cost, you don’t have to worry about car insurance and tax. A recent report by Edmunds.com points out that during your lease, you will pay nearly half the sales tax you’d have paid if you bought the car.
- The main downside of leasing is that the contract amount remains in place even if you get into an accident and total the vehicle. You’ll still have to pay the lease amount.
- Most car lease agreements have distance and time limits. Often, this is 60,000 miles/five years. You’ll get penalized if you exceed these limits.
- With a car lease, you can’t claim ownership, yet you’re still liable for repairs. As such, the car isn’t yours, but you’re responsible for any repairs it needs. You can’t claim these expenses at the end of the lease period.
- Once you sign a lease, you’re stuck with the car until the term expires. It’s difficult to allow someone else to take over the lease even if you no longer need the automobile.
- You can’t claim a leased vehicle as an asset because it belongs to the dealership leasing it to you.
Terms to Know Before You Lease a Car
When seeking answers to the question, what does leasing a car mean, you’ll want to know about the terms that dealers use. Here are some terms to keep in mind:
This refers to the maximum distance you can drive your car without facing penalties from the dealership. The limit is often stated as the total cumulative mileage. Penalties for exceeding the limits tend to be about 15 to 20 cents per mile.
The acquisition fee is the amount charged by banks and leasing companies to cover the costs of administering the lease. The average acquisition fee is $400 and is seldom negotiable.
Some lease agreements allow you to purchase the car at a predetermined residual value when the lease expires. However, if a lease doesn’t require you to buy the vehicle, it’s referred to as a closed-end lease. As such, you can buy the automobile if you want when the lease ends.
Arguably, this is an essential part of a car lease. The capitalization cost is the negotiated selling price of the vehicle plus additional fees that might get included in your monthly lease payment. If you negotiate a lower lease price, your monthly payments will also reduce.
Capitalized Cost Reduction
Capitalized cost reduction is the credit or down payment that reduces the car lease’s capitalized cost. Generally, the capitalized cost reduction may be a trade-in allowance, cash, rebate, or other credit.
A car’s residual value refers to its wholesale value when the lease expires. Often, the value is predetermined at the start of the lease. A higher residual value translates into lower monthly payments. However, it will cost more to purchase the car when the lease ends.
Buying vs. Leasing: Which Is Best?
The choice between leasing and buying a car is generally a tough call. Before you decide, you first need to ask, what does it mean to lease a car? How does it differ from buying? Well, leases tend to have lower monthly payments. For this reason, you can drive a vehicle you wouldn’t be able to buy outright.
On the other hand, buying involves higher costs, but ultimately, you own an asset. With leasing, you get into a cycle of repayments with little hope of ever owning the vehicle. You can’t even use the vehicle as security to acquire a loan. The same cannot be said of those who own a car. Thanks to the unpredictable nature of life, leases tend to be less flexible than purchases.
If you’re at a crossroads and don’t know whether to buy or lease an automobile, you’ll want answers to the question, what is leasing an automobile all about? The two options can also be confusing, especially if you’re buying or leasing an automobile for the first time.
If you want to know what leasing a car means, the auto brokers at AutoSwiftly can help. We’re a premier car concierge service dedicated to helping you find quality vehicles at budget prices. We can also help you to sell your current car. Apply now to get pre-qualified for an auto lease or purchase.