How does auto leasing work? – Part 1

How does leasing a car work?I have to be honest, not all that long ago I wouldn’t have given a second thought to leasing a vehicle. Traditional financing always worked just fine for me. But, as with anything, once I learned more about auto leasing, not only would I give it a second thought, I’m giving some serious consideration to leasing my next vehicle. I can only assume you’re reading this because you have questions about leasing a vehicle. So, how does auto leasing work?

The first step in understanding leasing is becoming familiar with some of the terms involved. (I know – boring. But it really is important.) If you’ve purchased a vehicle using traditional financing before, lease is quite different. Here are a few definitions you should know to get you started:

  • 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, 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

Now that we have that out of the way, we can move on to some of the more exciting (?) pieces of how auto leasing works. But since I’m out of space for today, next time I’ll discuss leasing the right vehicle for you.