Is Leasing Right for You?
by The Editors of MSN Autos
Leasing offers an attractive and affordable means of driving a new car every few years. However, leasing involves a number of contractual obligations.

Leasing—rather than financing or paying cash—has become a popular method of acquiring a new car or truck.

It's easy to see why. Some advertisements tempt with promises of "zero down" and low monthly payments on two- or three-year leases. Often you can lease a more luxurious car for the same monthly payment you would have if you were financing a lower-priced car. This helps explain why leasing grew in popularity during the 1990s. And even now leasing is projected to continue to account for about one-third of total vehicle sales in the years to come. What is leasing really all about?

What is Leasing, in a Nutshell?
Leasing is paying for the use of a car, rather than actually paying for the car itself. The bottom line is that your lease payments cover the cost of the vehicle's depreciation over the length of the term of the lease, instead of the vehicle's actual purchase price. You (the "lessee") are expected to maintain the car during the lease, but when the lease is over you can either return the car or exercise the option to purchase it. Conceptually, that's how it works. But in practice, there are a number of factors to consider before you decide whether or not leasing is appropriate for you.

Is Leasing Right for You?
Leasing isn't for everyone, but for those willing to accept certain limits, leasing offers an attractive and affordable means of driving a new car every few years. If you're interested in leasing, you should make sure you're comfortable with some of the basic aspects. Ask yourself the following questions:

If you answered "yes" to two or more of these questions, then leasing may be right for you.

Lower Payments and Zero Down
It may sound like a dream, but leasing makes it possible. Since the amount a vehicle depreciates over a two- or three-year lease is less than the cost to finance that vehicle over the same time period, monthly lease payments can be less—and considerably so in many cases. This allows consumers to use the money they save for other things, or to lease a more expensive vehicle than they could normally afford to finance for the same monthly payment. To arrive at this monthly lease payment, a leasing institution (the "lessor") combines the vehicle's estimated depreciation over the lease period with the interest being paid by the lessor to finance the car, plus assorted dealer fees.

Most leases can be initiated without a down payment (known as a "capitalized cost reduction," in leasing terms). Again, because lease payments are based on a smaller amount of money than if the vehicle is financed, less money is needed up front to initiate a lease. A down payment may be utilized in some instances to lower monthly payments to an especially attractive figure; however, this counters one of the main benefits of leasing, which is getting a new car with little money down.

Two- and Three-Year Leases
The short lease periods available are very attractive to consumers who like the idea of driving a new car every two or three years. It also helps keep maintenance costs down by avoiding the high cost of maintenance and repairs that an older vehicle with high mileage often requires. Since most manufacturer warranties cover vehicles for at least the first two or three years—with the exception of required routine servicing—most serious maintenance costs get absorbed by the manufacturer anyway. Beware: those who may be thinking of terminating a lease early should think twice since there are severe penalties for early lease termination.

Returning the vehicle at lease-end
At the end of the lease, you have the option of returning the vehicle to the lessor, extending the lease or purchasing the vehicle. If you choose to return it, some basic requirements must be met:

  1. The vehicle must be in good shape (as determined by the lessor) and free of excessive "wear and tear." Any evidence of rough or abusive treatment will result in repair costs being charged back to you.
  2. The vehicle must be returned as delivered. Any performance modifications or aftermarket parts and accessories that had been installed by the lessee during the lease must be removed and the vehicle returned to the same condition that it was in when it was first leased.
  3. Total mileage must not exceed the annual mileage cap set by the lease. If the vehicle has more miles than the leasing agreement stipulates (the normal mileage cap is usually 15,000 miles per year), you may be charged anywhere from 10 to 25 cents per mile for miles over the mileage cap. It pays to stay within the mileage limits.

Buying the Vehicle at Lease-End
If your lease includes a purchase option, you may choose to purchase the vehicle at the end of the lease. In evaluating this option, another set of factors must be considered, foremost of which is the vehicle's lease-end value, or residual value. With the more common closed-end lease, the residual value is actually calculated at the lease's inception. This ensures that you pay a predetermined amount regardless of the vehicle's actual market value. If the market value is higher than the residual value, then you're getting a good deal. If the residual value is less than the market value, the lessor—not you—absorbs the loss. Regardless of market value, you pay the same.

Copyright Information
Title: Is Leasing Right for You?
Author: The Editors of MSN Autos

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