What is a Lease?
Leasing is the use of a motor vehicle for a fixed period of time at an agreed monthly payment amount for the predetermined time of the lease. Leases will typically be 24, 36, 39, or 48 months in length. The key difference in a lease is that after the primary term, the vehicle has to either be returned to the leasing company or purchased for the residual value.
What does residual value mean?
The leasing term "residual value" refers to the remaining value of the vehicle at the end of the initial lease term. Sometimes referred to as Lease End Value. This is typically a percentage of the MSRP and is determined by the leasing company at lease inception. The difference between the residual value and the selling price is the depreciation (rental charge) and how the base lease payment is calculated.
Why is the payment almost always lower when you lease?
With a lease, your monthly payments are based on the depreciation of the vehicle during the lease term. You're paying the difference between the selling price and residual value. Also, with a lease, you are paying the sales tax on a monthly basis instead of upfront, as is the case with a traditional purchase. Typically, lease terms are shorter, so down payments, trade equity, and rebates have a larger impact on lowering the monthly payment. In many cases, the lease factor used to calculate the interest on a lease is much lower than the interest rate on a financed loan. All these factors contribute to a lower payment.Â
Why do so many people lease?
Leasing is a popular option with consumers for a few reasons:Â
- Lower payments
- Always under warranty (for 24 and 36-month leases)
- New vehicle every 2 or 3 years
- Little or no maintenance or repair costs
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