What Does It Mean To Lease A Car?

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What does it mean to lease a car? Most young car buyers cannot afford a car and need to opt into a car lease to help them complete the purchase. In this article, we will delve further into defining the parameters of a car lease as well as an understanding of your responsibilities of owning one.

Related: How To: Leasing A Car With Bad Credit 101

What Is The Definition of Leasing A Car?

Some people can be rather naive about what a car lease is… the people over at Stratton Finance explain it best here

Most think it’s a long-term rental, some think it’s a small pocket loan.  In agreement, a lease is when a lessee pays a sum of money to the lessor to use the car while making on-time payments.

Usually, there is a set agreement where the lessee and lessor agree on a set amount of time to use the car, which usually lasts 2-3 years.

Under the lease, the lessee, or driver, is only allowed to drive a certain set amount of miles, which usually comes out to 12-15,000/year.

If you make on-time payments and show to be trustworthy, your mileage can increase and the agreement can change for your benefit.

With a current understanding of what a car lease entails, here are some additional restrictions to remember:

  • Required insurance coverage
  • Certain mileage restrictions
  • You’ll be required to perform maintenance such as oil changes and tire rotations
  • Pay out-of-pocket repairs that aren’t covered by your lease or dealership-issued warranties.

Related: What Are The Pros And Cons Of Leasing A Car?

The Basics Of Car Leasing

Many people often mislead the truth about car leasing which is that it can be affordable and a great option for a variety of people that:

  • Have a great credit history
  • Want to own a car in less than 4 years
  • Drive less than 15,000/year

The unfortunate circumstance that surrounds basic car buying is that many don’t understand how leases work.

Most people assume that leasing a car is simply another way of saying that you’re financing a vehicle.

This is simply not the case.

By leasing a car you are not only paying to use the car and paying interest, but you have to return the car in the your agreed upon time frame; most leases rang from 24 to 36 months. Only in some rare cases can you lease a car for a year.

The Top 5 Numbers You Need To Know In A Lease Agreement Are:

1. Sale Price – The lease payment that you pay on a monthly basis is based partially on the sale price of your car. The best way to figure out what you’ll be paying is to check out the True Market Value (TMV) and see if the car you’re looking at is affordable for your budget.

2. Residual Percentage – The higher your residual percentage is, the lower cost of depreciation you owe. So, if you pay off a higher residual percentage, you’ll be making lower monthly payments.

3. Mileage Limits and Charges for Going Over – Your lease will specify the number of miles you are allowed to drive annually. If you go over the limit, you will be charged a fee per mile, usually between 15 and 25 cents per mile. If you think you are going to go over the limit, you can opt to increase it for a small fee.

4. Disposition Fee – This is a fee charged by the leasing company that covers cleaning and selling the car after you return it. Unless you choose to buy the car at the end of your lease, you will have to pay this fee.

5. Money Factor – This is similar to an APR on a car loan. The lower this amount is, the better.

Related: How To Get Approved For A Car Lease

What Are The Average Fees And Taxes?

Unfortunately, leasing a car involves more fees that you would not have to pay if you bought the car outright. When you first sign your lease, you will have to pay a down payment, acquisition fee, disposition fee, and sometimes a refundable security deposit.

The acquisition fee is usually between $250 and $1000 and the disposition fee can range from $200 to $400. You will also have to pay regular vehicle fees like registration, dealer doc, title, tag, and license fees. If you choose to purchase your car at the end of your lease, you will be required to pay these fees again at that time.

Are You Responsible For Maintenance Costs?

Typically yes, it is your responsibility to pay any maintenance costs during the length of your contract. This includes basic maintenance like oil changes and tire rotations and larger fixes too.

Check your manufacturer’s warranty. If your car lease lasts for the length of the warranty, you may not have to pay for certain fixes.

Are There Insurance Requirements For A Leased Car?

Yes, there are. You will still need to purchase an auto insurance policy for your leased car just as you would if you owned it. In addition to your state’s required insurance coverage, you will also need to purchase collision coverage and comprehensive coverage. Your state may have additional requirements for leased cars.

Collision insurance provides coverage for damage to the car from either another car or object. Comprehensive covers damages and loss not caused by a collision. This can include theft or fires.

Your lessor may also require you to get gap insurance. If your car is completely destroyed beyond repair, there is usually a difference between the amount you owe the dealership and the amount of the check from your insurance company. This difference is called the gap. Most of the time, this gap insurance is included in your monthly lease payments.

Now that you know the answer to the question “what does it mean to lease a car?” you can head over to your local dealership and think about pricing out a car.

Hopefully, this guide of understanding what a lease is could offer you a deeper understanding and you’ll use it to your advantage during your next car lease.

Feel free to comment below if you have any further questions about car leases, I’ll be happy to answer them for you!

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