How Does Car Leasing Work, and Is it Best to Lease or Buy?

How Does Car Leasing Work, and Is it Best to Lease or Buy?
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Charl van Rooy

Essentially, leasing a vehicle is an extended rental. When you enter into a lease, you must make an upfront payment and subsequent monthly payments for the duration of the lease, during which you use the car as you please. When the leasing period comes to an end, you can either sign a new lease, buy the car, or go carless.  

Read on for more information on how car leasing works, the benefits and drawbacks of leasing a car, and the difference between leasing and buying.  

How does leasing a car work?

A car lease is a contractual arrangement between the company or dealership that owns the car, the lessor, and the person who will borrow it, the lessee. On average, lease agreements last between two and four years. The corresponding monthly payments vary based on the vehicle’s depreciation value. Specifically, this refers to the difference between the car’s current market value and its value once the lease has ended, as the car’s worth will decrease the more you drive it. In addition to monthly payments, you will also pay interest. 

Pros and cons of leasing a car

Not surprisingly, there are pros and cons to leasing a car. They all depend on your personal preferences, your financial circumstances, and what works best for you currently.

Benefits

Monthly lease payments are typically lower than the traditional loan installment payments that come with buying a car. What’s more, the vehicle will include a manufacturer’s warranty. Leasing a car also allows you to drive the newest models. The majority of leased vehicles are new, not used. And, once the lease ends, you have the option of buying the car or leasing another brand-new one. 

Drawbacks 

Though leasing may seem more affordable at first, it will cost you more in the long run. Monthly payments are continual for however long you choose to lease the vehicle. Borrowers are subject to several extra fees on top of repeated expenses. These include an acquisition fee, a disposition fee that covers the company’s costs of preparing the vehicle to be soldagain, mileage fees if you drive beyond the distance permitted by the lease, and a security deposit. 

Also, it can be tricky and quite costly if you wish to get out of your lease early. 

Finally, the most obvious downside is that you’ll be without a car once your agreement expires. 

Leasing versus buying a car

When leasing a car, you’re only required to pay the depreciation price. In comparison, when you buy a car, you must pay the entire market price of the vehicle. Once you sign a lease, it cannot be changed or terminated without you having to pay a penalty since it is a binding contract, whereas, once you purchase a vehicle, you can choose to keep it, sell it, or trade it in whenever you’d like. Again, the most notable difference between leasing and buying is that regarding the former, you no longer have a vehicle once the contract expires, and you must make other transportation arrangements. In comparison, once you purchase a car, you own it, for better or for worse.

Online automotive lease calculators are an excellent option to keep in mind when making this decision. They can help you determine more accurately how much you will be paying and saving.

How to lease a car

Described below are the basic steps of how to lease a car. 

Step 1: Check your credit score. A bad credit score is often a contributing factor in why a dealership decides not to approve you for a lease since dealerships, like banks, consider this value before doing business with you. They must know that you are reliable. 

Step 2: Know how much you can afford to pay upfront. Again, leasing a car requires you to pay multiple fees and interest payments, so establishing a budget and being familiar with your expenses is extremely helpful in ensuring that you can indeed make payments on time. 

Step 3: Test drive cars to determine the model you'd like to lease.

Step 4: Be aware of your driving habits. If you're driving long distances daily, you'll need to ask for a higher mileage allowance.  

Step 5: Visit dealerships. It's wise to visit various car lots and see which are willing to offer you the best deal. Ultimately, a leasing agreement is a negotiation between two parties, the lessor and the lessee. You don't want to commit to the first offer you receive without proper research. 

Step 6: Sign the lease agreement. Always read the contracts thoroughly, so no conditions or fees catch you off guard. 

All that's left for you is to start driving. But remember, you don't own the car, so anything that happens to it while it's in your possession will be reflected in your bills. 

4 mistakes of avoid when leasing a car

One: Paying too much upfront. Though leasing can lead to more affordable monthly payments, in most cases, you’ll pay a large sum up front to receive that benefit. The money you pay is not reimbursed to you if anything happens to the vehicle. So, experts recommend that you pay no more than $2,000 initially. 

Two: Not buying gap insurance. Gap insurance refers to the remaining amount you owe on your lease and the value of the car. This type of coverage will give you room should you wish to end your lease early, or you’re able to buy the vehicle itself before the contract period ends. 

Another helpful tool to keep in mind concerning car insurance is Point Card. As a Point cardholder, you’ll have car and phone insurance, which will help you  focus on finding and selecting the car arrangement that works best for you while knowing that Point has your back every step of the way. 

Three: Not maintaining the car. Though the definition of “good car maintenance” varies from dealership to dealership, you should always be mindful of the vehicle. You are liable for any damage or repairs needed. Lease agreements should outline any corresponding guidelines where damage is concerned. 

Four: Underestimating mileage. Most lease agreements provide allowances of 10,000, 12,000, or 15,000 miles, and exceeding this cap results in financial penalties. Knowing how much you drive allows you to negotiate a higher limit. However, this will increase your monthly fees as well. 

Which is best for you, leasing or buying? 

Leasing a car is less expensive in the short run. You only need to pay the depreciation value and the subsequent monthly payments. However, buying a car is a more practical option in the long run. While it can take some time to pay off the loan, the car is yours once you complete all your installments, and you don’t have to pay for it anymore. 

At the end of the day, it all depends on your lifestyle. 

Point’s contributions

In addition to giving you the freedom to spend your own hard-earned money how you want to, Point Card is a tool that can help you address other financial matters that arise in daily life, such as protection against fraud and interest rate fees. Cardholders are entitled to cash-back on all purchases, plus bonus cash-back on subscriptions, food delivery, rideshare services. What’s more, membership includes phone and rental car insurance, the latter of which will help alleviate the demands associated with acquiring a new vehicle. 

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