How does a car lease work?

Written by kelly townsend
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How does a car lease work?
(Flickr: http://flickr.com/photos/chrisbevan/84415/)

Proponents of leasing cars instead of buying them point to that when you purchase a car, it depreciates the moment you drive it off the lot. On the other hand, when you lease a car, you only pay for the expected depreciation amount. For that reason, leasing a car sometimes makes more sense than committing to purchase a car at full value.

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Proponents of leasing cars instead of buying them point to that when you purchase a car, it depreciates the moment you drive it off the lot. On the other hand, when you lease a car, you only pay for the expected depreciation amount. For that reason, leasing a car sometimes makes more sense than committing to purchase a car at full value.

Leasing a car basically means that you are paying to use the car for a certain period of time. When you lease an automobile from a car dealership, the dealership essentially sells the car to a leasing agency. The car dealership is typically rewarded with a commission for giving the leasing company a new customer.

Once the car is leased to you, you begin making monthly payments. The payments are calculated by estimating the amount of depreciation the car will experience during the time period that you have it. Say, for example, that you lease a £19,500 car and the leasing agency estimates that the car will be worth £13,650 after it is finished being leased to you. In that example, your monthly payments will be directed at paying that £5,850 dollar difference.

If you were to purchase the same car upfront for £19,500, the moment you drive it off the lot it is worth much less. Cars depreciate at the same rate no matter whether they are purchased or leased. Therefore, if you aren't concerned with eventually owning the car, leasing is almost always the better deal in terms of paying a lower monthly payment.

In addition to the depreciation, other charges are factored in when calculating the monthly payment. The biggest such charge is the finance charge, which is a varying percentage based mostly on your credit score. Other smaller charges of a leased car include tax and licensing fees. Down the line, you may also have to pay if you go over the allotted amount of miles or if the car is damaged. And of course, almost all leasing agreements require that car insurance be kept current on the vehicle.

At the end of the leasing agreement, you will likely be given an opportunity to purchase the car. The purchase price is typically the subsequent value of the car after the depreciation. Alternatively, the car may be leased a second time, which will again entail estimating the depreciated value at the end of the leasing term.

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