New Car Leasing Overview

Auto lease

Your new car guide to auto leasing

In this section, we outline what auto leasing is, the advantages and disadvantages of leasing, the people who benefit most from leasing and the options available to you when it's time to turn in your car at lease-end.

What is leasing?

Leasing a new car is very similar to financing a new car.  In essence, you make monthly payments, with interest, throughout the course of your contract, which could last anywhere from 24 to 48 months or more depending on the agreement.  However, instead of owning the vehicle at the end of the term, you turn the car back into the leasing company and begin a new lease on a new car, among other options. 

What are the advantages of leasing a new car?

The advantages to leasing a new car include the ability to drive a more expensive vehicle for lower monthly payments and less money down, the ability to drive a new vehicle every few years, the opportunity to drive a vehicle that's covered under a warranty during those years, and avoiding the hassles associated with having to trade in that vehicle, or sell it outright, at the end of those years.

Disadvantages of Leasing

Probably the biggest disadvantage of leasing a car is the limitation on yearly miles driven.  If you exceed the miles stipulated in your leasing contract, you'll be responsible for paying a penalty at the end of the lease term.  Also, at the end of the lease, you technically do not own the vehicle which means you've made monthly payments over a period of several years without having a tangible asset to show for it at the end of the contract.  Finally, the leasing process can be rather difficult, with lengthy and oftentimes confusing contracts.

Who should lease a new car?

If you're the type of person who likes driving more car for your money, driving a new car every 24 to 36 months, driving a vehicle that's covered under warranty, appreciates the convenience of handing over a vehicle at the end of a lease term and can stay within the mileage limitations, then leasing is probably your best bet.

What is residual value?

The term 'residual value' is the depreciated value of a car at the end of its lease term.  This amount is estimated and set by the leasing company.  It is also the value upon which your monthly car payments are calculated.  For example, if you leased a car valued at $30,000 and its residual value was $15,000 at the end of three years, your monthly car payments would be based on $15,000 of depreciated value divided out over 36 months.  Instead of making monthly payments based on the car's starting value of $30,000, you would make monthly payments on its depreciated value of $15,000.  This is why leasing is popular among people who want to drive more expensive cars for less money on a monthly basis.

End-of-Lease Options

When your car nears the end of its lease, you have a variety of lease-end options to choose from, including returning the vehicle, extending the lease, re-leasing the car, buying the car or trading in the car.  Because it's important to know what's involved with each of these options, we offer further information below.

Option 1:  Return your car

Returning your car to the leasing company is probably the most common and simplest lease-end option.  However, keep in mind if you've exceeded the miles set forth in your contract, or if there is extensive damage to the vehicle, you could be on the hook for penalties and repair costs made payable to the leasing company.

Option 2:  Extend your lease

In some cases, you can extend your car's lease for a limited period of time.  Oftentimes, people choose this option when they're still determining the right lease-end option decision to make.

Option 3:  Re-lease your car

At lease-end, you have the option of re-leasing your car.  Essentially, this means starting a new lease on the same vehicle, otherwise known as a 'used car lease'.  Even though used cars typically bring higher leasing interest rates (or money factors) there are benefits to choosing this option, including lower monthly payments and avoiding the logistics involved with shopping for a new car.

Option 4:  Buy your car

You have the option of buying your car at lease-end for its residual value.  Again, residual value is the car's depreciated value at the end of the lease term.  If its residual is less than its blue book value, you may be able to save money versus buying it from a dealer or a private party at a higher price.  Be sure to take into account any costs associated with mileage penalties or repairs.  These additional expenses could offset the car's equity.

Option 5:  Trade-in your car

Again, if your car's residual value is higher than its blue book value, you might consider trading in your car towards the purchase of a new one.  Be sure to research your car's book value ahead of time and once again, don't forget to factor in any additional expenses for mileage penalties or repairs that could offset its equity.

When it comes to leasing or financing a new car, it's important to assess your needs, your budget and your lifestyle to determine which option is right for you.

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