Car leasing is a lot like renting an apartment; you pay a monthly fee to use it but don't own it -- and aren't making payments toward ownership. The leased vehicle remains the property of the lessor -- the company that issued the lease.
As with an apartment rental contract, car leasing will have a fixed period -- typically two or three years. You're obliged to make monthly payments for the length of the contract. While you can get out of the lease before then if you want to, there will typically be extra costs -- for example, an "early termination charge" -- typically spelled out in the car leasing contract you sign. And as is often the case with renting an apartment, you'll likely have to put down some cash as "security deposit" at the lease inception. This money will be used to pay for any damages to the vehicle -- such as door dings, stains on the seats, any needed service work, etc. -- when you return it at the end of the car leasing term.
A big advantage of car leasing is flexibility. You aren't making a long-term commitment. Typically, car leasing is for a relatively short period, 2-3 years being the norm. The average new car loan, on the other hand, is five years. When the lease period is up, you can simply bring the car back and walk away. Or you can buy it if you like by paying off the remaining balance -- called the "residual value" -- which you'll negotiate in advance at the time of lease inception.
Or go shopping for a new car -- or no car at all.
You have many choices.
Also, since you are only renting the car, your total cash outlay should be less. You won't have to make as large a down payment (a security deposit and the first month's payment are the typical initial out-of-pocket fees associate with car leasing) as you would if you were buying. And monthly lease payments are almost always less than payments would be if you bought the car. That means you'll have more money left over to spend on other things.
Or, if you prefer, you can "afford" to drive a more expensive car when you lease, since the monthly payments will be comparatively lower. This is one of the biggest single attractions of car leasing for many people. A car (or truck) that might cost you $500-$600 per month to buy might cost $100 per month less with car leasing.
Another nice thing about car leasing is that you're always driving a new or nearly new vehicle. And of course you don't have to worry about the potentially expensive repair and/or maintenance problems that inevitably crop up as a car ages -- and gets out of warranty. The leased car will typically be under factory warranty for the duration of the lease -- and car leasing contracts often have add-on provisos that cover routine maintenance, such as oil changes, etc.
Car leasing may also have tax advantages for you -- but this is something you'll have to ask your accountant about. In the past, most people who did car leasing were those who used their vehicle for business, such as realtors -- and who therefore could claim deductions for car leasing not available to those who purchased them outright.
Car leasing had the additional attraction of freeing up assets for investments and so on that would otherwise be locked into a depreciating asset -- the person's car or truck.
There are downsides to car leasing, of course. Since you're only making what amount to rental payments each month, you won't have anything tangible to show for your money at the end of the lease. If you spend, say, $12,000 on car leasing payments (about $450 per month) over two years, that money is gone forever.
A person who buys his vehicle, on the other hand, has the comfort of knowing that one day, it will be "paid for" and -- assuming it is still in good shape at that point -- will provide "free transportation" until it breaks down or the owner decides to get rid of it.
In addition, a person who owns his car has equity (cash value) in the car or truck. Even though it will continue to depreciate with each passing year, so long as it's still serviceable transportation, it will always be worth something. That value can be used as a trade-in; or the vehicle can be sold privately to help raise money to pay for a new one -- or for some other need.
The person who opts for car leasing must start from scratch every time.
There's also the mileage issue. If you decide on car leasing, your contract will typically stipulate the maximum number of miles you're allowed before the end of the lease. If you exceed that figure, it can get expensive. Per-mile charges over the stated maximum listed in the car leasing contract are often exorbitant -- so if you drive more than the allowed miles in the contract annually, leasing could turn out to be more expensive then you thought.
The person who owns his car, meanwhile, can drive it as much as he wants, and do pretty much whatever he feels like with it, too. He can swap out the stereo, add different wheels and tires, change the exhaust system -- whatever. Do this with a leased car and you'll have to pay whatever if takes to put the car back the way it was. If you own your vehicle, the inevitable door dings and dents -- as well as coffee stains on the seat -- can also be shrugged off.
People who lease their vehicles, on the other hand, can expect to be charged for every nick, tear or spill at the end of the lease. The cost of these repairs will be deducted from the security deposit.
Car leasing is also more complex than buying so always closely read -- and be sure you understand -- every proviso of the lease contract before you sign. If you're unclear about anything, get expert advice -- or walk away.
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- Leasing Articles and Advice at AOL Autos