Leasing Explained -- Again
Car leasing is often misunderstood by automotive consumers. Is it like apartment leasing? No. Is it like car renting? No. Is it like a loan with a balloon payment? No. Although car leasing has some similarities to all of the above, it's still different.
We explain leasing on our web site, LeaseGuide.com, in a number of different ways to make sure it's understood. However, there's one more way that I'll add here that may help further understanding.
If you've recently been in the market for a new home, you may be familiar with interest-only mortgages, a relatively new financing method that has become very popular in the last few years. The way it works is that you only pay the interest on your home loan, which is a great idea when interest rates are relatively low and home prices are appreciating. Then, in 3 or 5 years, your loan becomes due in full, and you have the choice of refinancing or selling the house for a possible profit.
Car leasing is very much like an interest-only home loan. You pay the lease company interest on the money they spent to buy your new car from a dealer. The difference is that, instead of financing an appreciating asset such as real estate, you are financing a depreciating asset -- a car. This means the financing company (lease company) knows that the vehicle will be worth less at the end of the financing period than at the beginning. Therefore, in addition to monthly interest payments, you must also pay off the amount by which your vehicle is estimated to depreciate during the lease term. Then, at lease-end, you have the option of refinancing, or repaying the lease company either by paying them cash to buy the car or by returning their car.
I hope this helps in understanding leasing.
We explain leasing on our web site, LeaseGuide.com, in a number of different ways to make sure it's understood. However, there's one more way that I'll add here that may help further understanding.
If you've recently been in the market for a new home, you may be familiar with interest-only mortgages, a relatively new financing method that has become very popular in the last few years. The way it works is that you only pay the interest on your home loan, which is a great idea when interest rates are relatively low and home prices are appreciating. Then, in 3 or 5 years, your loan becomes due in full, and you have the choice of refinancing or selling the house for a possible profit.
Car leasing is very much like an interest-only home loan. You pay the lease company interest on the money they spent to buy your new car from a dealer. The difference is that, instead of financing an appreciating asset such as real estate, you are financing a depreciating asset -- a car. This means the financing company (lease company) knows that the vehicle will be worth less at the end of the financing period than at the beginning. Therefore, in addition to monthly interest payments, you must also pay off the amount by which your vehicle is estimated to depreciate during the lease term. Then, at lease-end, you have the option of refinancing, or repaying the lease company either by paying them cash to buy the car or by returning their car.
I hope this helps in understanding leasing.
posted by Al Hearn at 12:26 PM
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