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Once considered only for businesses and the wealthy, leasing now accounts
for a third of all new cars sold as well as a growing number of used cars.
Basically, the difference between leasing and buying a car is this: with
conventional financing you are paying off the entire cost of the vehicle.
A lease allows you to pay only for the amount of the vehicle actually
used.
Leasing has become popular for several reasons. It requires little or no down payment, monthly payments are lower, you can obtain a better-equipped or more expensive vehicle, there is no bothering with trade-in or reselling at the end of a lease and there is usually no up-front sales tax.
However, leasing is not for everyone. To some people, owning a car is important. Also, people who tend to keep their cars for more than five years are typically better off with a regular purchase. But for those who want to meet their transportation needs with a minimum expenditure so as to utilize money for other purposes, a lease can be the perfect solution.
Lessees should be sure that they understand the details prior to entering a lease. Basically, lease payments are determined by taking the capitalized cost, which is the selling price of the car (including taxes and fees and after any trade-in allowance, down payment or negotiated discounts), and subtracting the residual value, which is the anticipated market value of the vehicle at the end of the lease period. This results in the depreciation that will be incurred -- in effect, the amount of the vehicle that will be used. The depreciation is divided by the number of months and added to the interest portion, which is the capitalized cost plus the residual value multiplied by the money factor (similar to an interest rate), to arrive at a total monthly payment.
One of the easiest ways to make sure that you understand a lease arrangement is to choose a finance source whose lease contract is easy to read and understand. For example, The First Class Lease from Mercedes-Benz Credit Corporation is just a single page written in plain English with all of the important information clearly presented.
The First Class Lease, which can be used for both new and pre-owned vehicles, also provides a good example of other features to look for including:
GAP waiver - covers the difference between insurance proceeds and the actual pay-off value of the vehicle (minus the deductible) if it is totaled or stolen.
Flexible terms - of any number of months between 24 and 60.
Flexible mileage - the amount of miles to be driven during the lease can be tailored to the driver with a refund provision for unused, prepaid extra mileage.
Diverse payment options - including payment of the entire lease up front, multiple security deposits to reduce monthly payments and payment by direct debit from a bank account.
Variable insurance deductibles - to lower premiums.
Multiple end of lease options - including returning the vehicle, purchasing it or re-leasing it.
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