Auto Leasing Basics

There’s a shiny new Pontiac G6 parked in your next-door neighbor’s driveway. Standing proudly next to it is a gleaming new Jeep Grand Cherokee. This is the second time in four years that your neighbor and his wife have driven home on brand-new sets of wheels. Unless you live right next to state lottery winners or an organized crime family, there could be a more plausible explanation for your neighbors’ seemingly good fortune: they might be leasing.

What is automotive leasing?

Automobile leasing is paying for the use of the car, rather than paying for the car itself. Monthly lease payments are based on the projected cost of the vehicle’s depreciation over the period covered by the lease. For instance, suppose you lease a car valued at $20,000. Over the course of a three-year lease term, let’s suppose the car depreciates in value to $10,500. This depreciated value, also called the vehicle’s residual value, is subtracted from the car’s initial value. The difference between the two values, in this case $9,500, is what you will be paying for the duration of the lease. Leases typically last for two four years, with leases on high-end vehicles and luxury cars sometimes stretching up to five years. When your lease expires, you have the option of either buying the vehicle or moving on to a new lease.

What are the benefits and drawbacks of leasing?

Monthly lease payments are generally lower than monthly loan payments on the same vehicle, assuming that the lease and the loan have the same duration. Leasing lets you drive a new vehicle every few years depending on the length of your lease. Additionally, leasing allows you to drive a more expensive and feature-packed vehicle for the same monthly payment you’d be making to buy a lower-priced model. Your leased vehicle comes with a warranty while it’s in your use. Furthermore, automobile leasing saves you the trouble of selling your used car or trading it in when you’re ready to buy a new one. Moreover, you may also write off a portion of your lease payments as a business expense if you have a legitimate business use for the vehicle. Ask a qualified accountant or tax professional about the eligibility requirements for the tax write-off.

While leasing offers several benefits, it also has its share of drawbacks. One disadvantage is that vehicles on lease programs have annual mileage limits, usually 15,000 miles per year. If you exceed the mileage limit, you will be charged a predetermined amount for every excess mile. Another drawback to leasing is the slew of fees and charges that you will have to pay at the beginning and end of the lease. Among these additional fees are the lease acquisition fee, the lease disposal fee, and the lease finance charge. There are also extra charges for extended warranties, insurance coverage, and other items. Furthermore, if you terminate the lease before the lease period is over, you will be assessed an early termination penalty. Another disadvantage to leasing is that you will have to return the vehicle when the lease expires, unless you choose to purchase the vehicle at lease-end.