Car leasing EXPLAINED: how to lease a car

Car leasing is one of the ways of getting a car at your disposal

car leasing

Car leasing EXPLAINED: how to lease a car. Source: pixabay.com

There are numerous ways of getting a car at your disposal. Car leasing is just one of them and it has both pros and cons for the customer. Hopefully, this article will help you to figure out whether this car financing option suits your needs.

Car leasing market basics

Leasing practice is quite popular in many countries. Market analysts have previously forecast the global car leasing market to grow at a CAGR of 12.61% during the period 2017-2021. Moreover, the new report by Technavio reveals an even more positive tendency, expecting the market size to grow by 14.63 million units during 2019-2023, progressing at a CAGR of close to 14%.

The use of telematics in leased cars is anticipated to boost the growth of the car leasing market. Previously, an average American citizen was expected to buy a new car or truck every 3 or 4 years. After the recession, this tendency decreased and the average age of U.S. automobiles on the road neared 11.5 years. Switches to another model were more likely to be connected with life changes like family growth than with the poor condition of a used car. However, new technologies bring additional conveniences. Today, cars can get outdated as well as gadgets so many people decide to update to newer models more often. The rise of vehicles powered by alternative energy sources and the growth of the sharing economy are contributing to the refusals from traditional buying too.

In 2018, the portfolio of leased assets (outstandings) in Europe grew by 6.4%, reaching €832.6 billion at the end of the year. The UK was the largest European leasing market in 2018, with new volumes worth €91.9 billion, followed by Germany (€57.6 billion) and France (€56.2 billion). Automotive assets, i.e. passenger cars and commercial vehicles, accounted for 69% (€267.8 billion) of total new volumes granted during 2018, remaining the largest individual asset segment of the European leasing market.

According to the Experian credit bureau, about 3 in 10 new cars driven off new car dealer lots in the USA are leased, rather than purchased.

Car leasing defined

Leasing a car stands somewhere in between rent and purchase on installments. Unlike actual buying, you won’t ultimately get a car in your garage. However, it also differs from the usual short-term rental.

Leasing a car stands somewhere in between rent and purchase on installments. Source: pixabay.com

Car leasing dealerships allow customers to use a brand new car (less frequently a used car) for the long term, usually around 2-4 years. You’ll pay a certain price for utilization, as well as guarantee proper maintenance and repair during the lease. The leasing price is paid in monthly installments. When the lease ends, you either return the car keys or extend the lease term. The finance company may even offer a discount on the monthly payment as it’s now an older car. In some cases, you may get the chance to buy this vehicle later with a discount too.

How much does it cost to lease a car?

When you lease a car, you have to pay for the difference between the vehicle’s price and its expected value at the end of the lease, plus interest and fees. Basically, you finance the company’s material losses caused by the fact this brand new car you got hold of will never be sold for its full tag price.

Leasing, as a rule, requires lower down payments and monthly payments than a car purchase. For instance, the average monthly lease payment for a new vehicle in the United States was $448 in the fourth quarter of 2018. The maintenance costs are also usually low since leased vehicles are almost always under the original factory warranty. In the third quarter of 2019, almost 29% of vehicles leased in the United States were new vehicles, with the others being sold outright. The percentage of used cars under the lease is very little, practically close to zero in some countries.

Some important financial terms that you’ll come across while leasing a car include:

  • Gross capitalized cost – the initial price of the car.
  • Net (adjusted) capitalized cost – is calculated by the formula: gross capitalized cost + taxes and additional fees – down payment and the value of your cap cost reduction.
  • Capitalized cost reduction – includes any rebates, trade-in credits, cashback offers, or down payments that will decrease your gross capitalized cost.
  • Residual value – the estimated worth of the car at the end of the lease term. The higher this number, the lower the depreciation (and the lower your payments).
  • Depreciation – the value of the car’s rental over the set period you will be driving it.
  • The money factor is the lease equivalent of the interest rate. It isn’t an exact analog, however, and is calculated differently than an ordinary interest rate. It applies not only to the net capitalized cost but also to the residual value as well.
  • Base payment – the depreciation amount divided by the number of months in your lease.
  • Monthly rent charge – the sum of adjusted capitalized cost plus the residual value multiplied by money factor.
  • Monthly lease payment – depreciation + rent (finance) charges + sales tax. That is the total amount you’ll pay each month.
  • Drive-off fee – the amount of money we must pay to begin the lease. Typically, this includes various DMV and leasing fees plus a security deposit.

In addition to lease origination costs, you’ll also have to pay registration fees, just as you would with a car purchase.

Some web-resources offer rough estimations of the car leasing costs so that you can adjust your budget plans beforehand.

The calculator for US citizens can be found here. A comparison tool for the UK is also available online. Nevertheless, the exact price may slightly differ from dealership to dealership.

The percentage of used cars under the lease is very little. Source: pixabay.com

While you are checking the prices, pay attention to the small font. Many leases are targeted at businesses, which means many deals are quoted excluding VAT. So, ensure you’ve checked if it says incl or excl VAT, and – if it’s the latter – add 20% onto the monthly price to find the amount you’ll actually pay.

Leasing on favorable conditions requires a good credit score too. Offering a higher down payment, or lowering the annual mileage of your lease will lower your monthly payments as well. If you have a vehicle trade-in, this can be a great start for your down payment. The higher your down payment is, the lower your monthly payments will be. On the other hand, if your vehicle is wrecked shortly after leasing, you will be out of any money you invested upfront. Therefore, think about a reasonable security deposit.

Lease buyout options

After driving a car for a while, you may wish to get it on a permanent basis. If you decide to purchase before your lease expires, it is equal to an early car lease buyout and you could have to pay extra fees or finance charges. Check the terms of your lease agreement to check the amount of incurred fees. Additionally, make sure the leasing company doesn’t misinterpret your interest in an early auto lease buyout as a desire for early termination of the contract.

The buyout price of a leased car — its residual value — is often listed in your lease paperwork or otherwise agreed upon. Sometimes it may be negotiable before you sign your lease. However, some companies have a no-negotiations rule when it comes to the purchase price on a lease buyout.

If you are looking to lease a vehicle for a set amount of time and then move on to another model, then looking for a vehicle with a high residual value is a good idea since your monthly payments will be lower. However, if you consider purchasing a vehicle at the end of the lease term, then looking for a lower residual value vehicle may be smarter. Although you will pay more monthly during the lease term, the purchase cost at the end of the lease will be lower.

The leasing company will likely want you to finance the purchase through them to get some extra profit with a markup. Some lenders also offer car lease-buyout loans that work like refinancing loans. You should compare the deals to choose the best one.

With the growing influence of fintech companies, the automobile sector has been transformed by a wide range of financing solutions featured by emerging digital platforms. For instance, California-based AutoGravity has partnered with Westlake Financial Services, Mercedes-Benz Financial Services, and First Investors Financial Group. AutoGravity is a fully-fledged digital marketplace for car buyers. AutoFi, an established Fintech auto finance company, has joined efforts with Ford Motor Credit.

The fintech disruption is present in the leasing market too. Some examples are Yes-Man, a Dutch company that combines crowdfunding with leasing, acting as a new path to the fleet acquisition, and Beequip, another Dutch enterprise, which uses a product and industry-specific knowledge to drive leasing.

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