Auto finance is now different. It is now populated with all sorts of choices to help you purchase that auto of your dreams. Auto lease deals are one of the fastest growing areas.
An auto lease is a long-term rental agreement - terms typically start at 24 months with 36 and 48 months much more usual. Auto lease agreements do have a few twists to watch out for though.
As the name suggests, you don't actually own the auto when you take out an auto lease. The leasing company owns the auto and then leases it to you. When the lease expires you return the vehicle. If you are within your agreed mileage target and the auto has suffered no worse than normal wear and tear then you can simply work away
As you don't own the vehicle the lease company can sell it at the end of your contract. Your payments therefore depend on the difference between the buying price and the selling price. Lease companies spend a lot of time and effort to ensure they have a good idea of exactly how much each vehicle in their fleet will be worth at the end of the lease agreement.
So, suppose you find a auto for $20,000 purchase price. The lease company does some sums and tells you that if you take out a 3 year deal with a 12,000 mile per annum mileage limit they will guarantee a residual value of $8,000. The net cost to the auto leasing company is $12,000 plus administration charges (setting up the deal and selling the auto at the end) and finance charges.
You pay lease charges on the $12,000 difference.
The result is that you can drive a new auto for low upfront cost and relatively low monthly payments. The downside is that you never own the vehicle and may have nothing to show for all your payments at the end of the agreement.
Remember that residual value mentioned earlier? Well that gets interesting at the end of the lease period. Auto lease companies usually set this at the low end of expectations. If you stay within the terms of your lease the chances are that the auto will be worth more than the residual value. This means you have 3 choices: 1. Buy the auto for the agreed residual value 2. Part exchange the auto and use the extra value as the deposit on your next lease vehicle. 3. Give the keys back and get on with your life
The most common option taken by auto lease customers seems to be to part exchange and use the difference as the deposit on the next auto.
There are downsides to auto leasing. In the long run it will always be more expensive than buying through an auto loan.
Auto leasing deals are not for everyone. To manage their risks auto leasing companies put tight constraints on the deals they offer. Leases are for fixed period and it is practically impossible to exit a lease early. Calculation of residual values is highly mileage dependent so you may find any excess mileage payments are expensive. Nevertheless, if you want to drive a new auto, can guarantee to keep the vehicle for the full term of the lease, and can stick to the mileage limits in your agreement, leasing can be a great choice.
