How to Lease a Car

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There used to be a time when people would save up money from their jobs or take out high-interest loans from the bank just so they could get themselves a car.

Little did they know that various companies were out there leasing cars. Instead of having to save up a fortune before you could afford a car, leasing makes the entire process much easier and more convenient.

With car leasing, you can get cars without breaking the bank, so to speak. Leasing means you no longer have to pay huge sums of money just so you can drive a brand new car. Today, it is common practice to lease a car instead of buying it.

Leasing vs. financing

It is essential to understand the difference between leasing a car and financing a vehicle. When you lease a car, you may only use it as long as the lease period stipulates.

And then you have to return the vehicle. On the other hand, however, when you are financing a car, you get to keep it at the end of the term.

How to lease a car

Leasing a car is, in essence, quite similar to renting. In order to lease a car, you first choose a car, any car that you like. And then decide on a length of time to pay for that car using fixed payments.

When you go to lease a car, you have absolute freedom over not just the kind of the vehicle but also about how the lease contract is designed.

For instance, you get to decide about the estimated annual mileage and how long the agreement is to last. But more importantly, you decide the structure of your payments.

There are various factors that come into action when the lessor decides the cost of your lease.

Some of these factors are the value of the car that has not been driven yet, how much your vehicle will be worth when the lease period ends, what the length of your lease is, and finally, what your annual mileage allowance is. All of these factors decide how much it is going to cost you if you lease a car.

Car leasing is not a complicated process; instead, it is relatively simple. When you go to lease a car in the UK, you are first required to submit an initial deposit; also called the initial payment.

In most cases, this initial payment is calculated by adding up a bunch of monthly installments. Once you have deposited the initial payment, now you have to make fixed monthly installments.

These monthly installments will continue until the end of the contract. How much money you pay in these monthly installments is directly linked with the length of your lease contract period.

If the contract length is long, you pay a small installment. However, you have to pay hefty monthly installments if the contract period is short.

Responsibilities

You are also responsible for defining the mileage you will be going to cover. This is done through a simple calculation. To calculate your mileage allowance, your previous service reports are considered, and then your new mileage is decided.

Once the lease contract is over, you are expected to hand over the car back to the leasing company. Once you return the vehicle, it will be checked over and you no longer have to make those monthly installments. As soon as your previous lease is done with, you are now allowed to lease another car.

Often times when the lease period ends and the car is returned, some people have exceeded the mileage allowance. But this is not something to worry about.

There is a simple solution for this. You just pay the amount of exceeded mileage by pounds per mile. And once you have cleared all your dues, you are eligible for a new car lease.

Leasing terms

Before you head out to lease a car or sit down with the dealer to draw up a contract, it is a good idea to learn about the terms you might come across. Here are some of the most common terminologies used in the car lease agreements.

Manufacturer’s suggested retail price (MSRP)

The manufacturer’s suggested retail price (MSRP) is sometimes called the “sticker price”. This is the price that you are able to negotiate, and the reason behind that is that it is not a fixed price, but a suggested one.

So if you really negotiate, you can reduce this price significantly in your favor. However, sometimes the negotiations do not work, because if you are trying to get a vehicle that is in high demand at the time, the dealer will not be inclined to reduce the price. 

Capitalized cost (cap cost)

Once you have negotiated down from the manufacturer’s suggested retail price (MSRP), what you arrive at it is called a capitalized cost or cap cost. At this point, the cap cost can also be referred to as the lease price.

We recommend that while you are dealing with the dealer, it is best if you do not let them know about your intentions regarding leasing the car. At least not until you have negotiated the price.

Often dealers like to tell you that the manufacturer’s suggested retail price is not negotiable based on the fact that you are going to lease the car and not buy it.

This, however, is not true at all. In a car lease, all the costs are negotiable, even the cap cost. So if your dealer is insistent on not negotiating, you should go see a new dealer.

Residual value

The residual value is the wholesale value of the car once the lease period is complete. The lessor determines this value. They decide by looking over the past data, specifically the previous resale data.

Depreciation

The depreciation is singlehandedly the most significant factor that affects your monthly lease payments.

Depreciation is the difference between the value of the vehicle when it is brand new and its residual value. In simpler terms, it is the decrease in the value of your car during its time of lease agreement.

Money factor or lease rate

A  lease rate or money factor is just another word for the interest rate. The money factor is the second most significant factor in your lease payments after the depreciation cost.

What happens when you lease is that the leasing company actually buys the vehicle from the dealer and then leases it out to you. The money factor or lease rate is, therefore, the amount of money the leasing company is charging you for tying up its capital during the lease period.

And like all other interest rates, the bank decides the money factor or lease rate after looking at your credit history.

Pros and cons of car leasing

There are various reasons why some people prefer to lease a car. Conversely, there are also many reasons why some people do not like to go for the leasing option.

Pros:

One of the most attractive features that drive an individual to lease a car is that they get to try out new vehicles more frequently than if they were to buy them.

When you lease a car, it also entitles you to the warranty period, which stays intact until the lease is over. This means that you do not need to spend a lot on the vehicle other than just routine maintenance.

Another fantastic feature of leasing is the lower costly monthly installments. Leasing means your installment will be a lot easier on your wallet than if you were going for the financing option.

And this is because you are not buying the car. When you lease a car, you are only paying for its depreciation for the amount of time the vehicle is in your use.

This means you get to enjoy a nicer, more expensive car which you otherwise would not have been able to do if you were to buy it.

Cons:

While most people find it feasible to lease a car, it still has some disadvantages. Over the length of the lease period, you often end up paying a lot more than you would if you had bought the car.

The other disadvantage we have already talked about is that even after spending all the money, you still do not get to keep the vehicle at the end. And if you wish to buy that leased vehicle, you have to look into other options.

Penalties and additional charges

When you lease a car, the leasing agreement comes with its own set of penalties and additional charges. Some of these to look out for are early termination fees.

As the name inrefers, this means if you end the lease contract before its expiry date, you have to pay the early termination fees. The lender can could also include some wear and tear charges.

These charges cover any wear or tear that happens to the vehicle during the lease contract. These are charges that go above beyond what is considered rational or reasonable use.

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Categories: Car Finance
Tags: How To