This article on car leasing may very basic to some people, but there are still may people that don’t completely understand car leasing and how it works. Some people think of leasing as renting a car, but that’s not a very good example. In fact it’s a very inaccurate way to think about leasing a vehicle. My goal here is to clear up any mystery about leasing and the way it works.
Car Leasing Basics
In one sentence I would describe car leasing as the practice of purchasing a predetermined amount of use of a vehicle measured in months and miles. The examples I use here to explain the concept of leasing will be based on leasing a new car from a dealership. There are dealers that will lease pre-owned or used cars and trucks, but this practice is very limited and doesn’t really apply to the type of leasing I will be covering on this car buying website.
A simple way to explain how leasing works is to think of a new automobile as having a useful life of lets say seven years. Obviously most new vehicles can last much longer, but after seven years the value is typically very low and a vehicle older than seven years may require increased maintenance and repairs so for the sake of explanation I will use seven years.
Basic Car Lease Example
Lets say the price of a new car is $20,000 and the residual value (value of vehicle after being used for a set period of time and miles) after a 3 year, 12,000 miles a year lease is $14,000. That means that the lease costs $6,000 for the 3-year lease period and that is the amount that it costs to
purchase that period of usage. Which calculates as $20,000 – $14,000 = $6,000. Paid over 36 months (3 years) that would be approximately $166.67 a month ($6,000/36 = $166.67). Of course that would be without, taxes, deposit, gap insurance, disposition fees, title, license, insurance or interest charges, which can raise the monthly cost considerably. The length of the graphic below represents the seven years of useful vehicle life and the first three segments are the 3 years or 36 months of leasing.
When the car lease period is over you can decide what you want to do with the car you just leased. Your choices are to return the vehicle, buy the car for the fixed lease residual value or you can sell the car to someone for any amount as long as you know that you will have to pay the residual value.
The basics of car leasing and how it works are not very complicated, but the way that the charges, fees and payments are calculated can be very confusing and very susceptible to car dealer scams. We will take a closer look at all the individual parts of car leasing and teach you how to lease a vehicle without being taken advantage of by the car dealership. You will find links below for discovering more detailed information on car leasing and the working details.