How does leasing differ from renting?
A lease is essentially a long-term rental. Leases usually have a one year minimum. Rentals may last one day.
Are there different kinds of leases?
Yes, several forms exist.
- Under the "closed-end" lease contract, sometimes called a "walk-away" lease, the car's value when you return it does not matter unless you have put extreme wear on the car. You return the car at the end of the term and "walk away." Payments are higher than under an open-end lease because the lessor (the leasing company) takes the risk on the car's future worth.
- An "open-end" lease involves lower payments. However, you gamble that the car will be worth a stated price, the "estimated residual value," at the end of the lease. If it’s appraised value at the end of the term equals or exceeds the specified residual value, you owe nothing and may be refunded the difference, if your contract provides for a refund. However, if it is worth less, you pay some or all of the difference, often called an "end of lease" payment.
What will a lease cost me?
- You probably will have to pay a security deposit and lease fee for the first month and possibly the last.
- You may have to pay an initial "capitalized cost reduction." This is similar to a down payment when you buy a car. By paying a large amount up front, you could, in effect, reduce your monthly payments. But by doing this, you lose one of the advantages of leasing: lower up-front costs.
- Other expenses may include sales tax, title, and license fee, though the lessor may pay them.
- A lease may include insurance. If not, you must provide your own.
- You might have to pay for repairs and maintenance after any warranty period expires, unless the lessor agrees to pay in your contract.
- At the end of the lease term, you may have to pay an excess mileage cost if you have a closed-end lease. (Under an open-end lease, the final appraised value of the car will reflect any excess mileage.) Excessive wear and tear also may cost you.
May I renew or extend my lease at the end of the term?
Yes, if your lease contained this option or you negotiated for it. Such an option may reduce your initial costs.
May I escape my lease early?
You have signed a binding contract that obligates you to make payments for a stated term. However, your contract may contain an early termination clause. This usually requires a minimum number of monthly payments before you may cancel, and may require you to pay a penalty.
What is a purchase option?
It allows you to buy the car when your lease term ends. The lessor must state the purchase price or the basis for setting this price in the initial lease contract. Purchase options are more common in open-end leases than in closed-end leases.
