How Does a Car Lease Work?

When it comes to getting a care to drive, the debate usually focuses on buying new or buying used. In most personal finances circles, the idea of leasing a car is repugnant. However, when I read the Four Hour Workweek a few years ago, I surprised to see that Tim Ferriss considered leasing a car an option, since it can provide you with the car you want for your lifestyle cost.

Since then, I have seen a few other posts and articles in favor of leasing a car. Generally, you can lease a car for less per month than buying. Plus, after three years or so, you can turn in the car without having to worry about selling and get a new car. While I?m happy with buying cars and driving them into the ground, I can see why those who like to regularly ?upgrade? to a new car might want to lease.

But how does a car lease work? Essentially, you are renting your car instead of buying it.

When you lease a car, you basically pay for its depreciation. We?ve all heard about the loss of value when you drive a new car off the lot. When you lease, you pay for the depreciation by financing the difference between what the car costs now, and what it is expected to be worth by the end of the lease (typically three years). So, if the new car is $25,000, and it will be worth $15,000 in three years, you will need to finance $10,000 for those three years.

If you want a similar monthly payment when you buy the $25,000 car and make payments over the course of three years, you would need a $15,000 down payment. Or, you could pay a higher amount each month, financing a larger portion of the $25,000. You could also draw out the loan term. Financing on a new car can usually be stretched out for 60 to 72 months. In that case, though, your interest charges start to add up.

There are other things to consider about the car lease, though. First of all, you need to know the mileage limits. Many car leases limit you to 10,000, 12,000, or 15,000 miles per year. If you want more miles, you can pay for them up front, increasing how much your car lease costs. If you don?t pay for extra miles for the year, you will need to pay for them at the end of the lease. Generally, though, extra miles cost less if you ?purchase? them beforehand, rather than paying for them as a penalty at the end of the lease.

In some cases, you might have to pay an extra amount at lease signing. Make sure you understand the terms. In some cases, you have to make a larger lump sum payment at the beginning or the end of the lease, in addition to your monthly payment. Also be aware of penalties that might be assessed for damage to the car during your lease period. You will need to drive carefully, and make sure that all of the required maintenance for the car is completed while you have the leased car.

For those who like getting new cars regularly, and don?t want the hassle of selling an older car, leasing can be a reasonable option. However, it?s important to be careful, and pay attention to realities of leasing.

(Photo:?NRMA New Cars)

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Source: http://www.bargaineering.com/articles/car-lease-work.html

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