How does auto leasing work?

An auto lease is where you pay for the use of a vehicle for a certain amount of time determined by your contract. Once the Lease Contract is completed, the vehicle is returned.

But how does auto leasing work?

If you’ve purchased a vehicle using traditional financing before, lease can be quite different.

There are some terms to know and factors to consider when trying to decide whether or not to lease a vehicle. First, the following terms are essential to know as you go through the process.

TERMS TO KNOW

• Capitalized Cost (Cap Cost)
  The price of the vehicle; this is negotiable, and can be reduced by putting cash down, adding a trade-in to the deal or by a manufacturer’s rebate. It can also be increased if the vehicle being traded in has negative equity (you owe more than what it’s worth)
• Capitalized Cost Reduction
  Anything that reduces the Cap Cost; it can be cash down, trade-in equity, a manufacturer’s rebate or a dealer discount
• Depreciation
  A vehicle’s estimated decline in value during the lease term
• Disposition Fee
  Charged by some lessors for the privilege of returning the vehicle and walking away; the cost is spelled out in the Lease Contract, so you will know upfront how much it will be
• Money Factor
  The cost to lease; much like financing has a cost to borrow (the interest paid), leasing has a cost to lease; also like traditional financing, the lease offer that is made is based on credit and a likelihood to pay
• Rent Charge
  Also known as a Lease Charge, this is the interest that is paid on a lease; one of the factors used to calculate the monthly payment
• Residual Value
  Estimated value of a vehicle at lease end; varies depending on length of a lease and miles contracted
• Total Monthly Payment
  Depreciation + Rent Charge + Monthly Sales or Use Tax (most states – check with your dealer to see how your state calculates taxes on auto leases); keep in mind most initially quoted payments, like the ones you see on television, are not the total monthly payment because they do not include the taxes; the total monthly payment is the final payment that you will be required to make each month

Next, there are many different ways to choose a vehicle to lease. You could go with the hot deal that you saw advertised on television. Or, you could take your time, do your research and choose a vehicle that suits your lifestyle, budget and is also a reasonable deal. But, when it comes to choosing the “right” vehicle, how does auto leasing work?

Well, I’m glad you asked.

LIFESTYLE

First, much like when you purchase a vehicle, you need to determine the type of vehicle you’re going to get, based on your lifestyle needs. The type of driving you do, how many passengers you typically carry, driving conditions – these things all play a part in whether you need/want an all-wheel-drive SUV or sporty convertible.

BUDGET

Once you determine the type of vehicle, the next item to consider is your budget and an affordable payment. Also, do you want to focus on base models, in an effort to keep your payment lower? Or, is it worth it to pay a little more in order to drive something with all the latest bells and whistles?

RESIDUAL VALUE

Another consideration, outside of personal preference, is the residual value of the vehicle you are contemplating leasing.

As mentioned above, residual value is the estimated value of a vehicle at lease end.

A higher residual value reduces depreciation, which is used to calculate your final payment. The less a vehicle depreciates, the lower your payment will be.

To do some research to see which vehicles are likely to yield better residual results, you can visits sites like edmunds.com, kbb.com and cars.com. If you’d like to see some general listings of which vehicles perform well, check out alg.com.

Still deciding whether to lease or buy a vehicle? Weigh your options by visiting our Buy or Lease page.