Five Ways to Lease a Car

lease a carMany people think of leasing as only one way to finance a new car. In fact, some think it’s renting, and not financing at all.

There are five ways to lease an automobile, making it the most flexible method of vehicle financing.

1. Straight Car Lease – With an ordinary car lease, you negotiate the vehicle price that the lease will be based on, make a down payment (or not), select a term (number of lease months), pay your up-front fees, and drive away. Your monthly payment will be about 30%-60% of a loan payment for the same car. At lease-end you’ll either return the car or buy it for the guaranteed purchase price in your lease contract.

2. Lease to Purchase - With this option you do a straight lease and then purchase your vehicle at lease-end as a way of preserving cash and minimizing monthly payments over the long term. The overall long-term cost is higher than a straight-out purchase and it spreads out monthly payments over a longer time (lease payments, then loan payments), but it reduces short-term monthly costs. This option is often used by people who need to keep their monthly expenses on budget and don’t mind the extra overall cost. If you think you might want to go with this option, always compare costs to a simple long-term loan before you make your decision.

3. Lease with Trade-In – You can trade in a vehicle when you lease, just the same as you can with a purchase. However, a trade-in vehicle’s value (trade-in credit) has a much more significant effect on reducing lease payments than on loan payments. Let’s assume you want to lease a car whose price is $25,000 and its lease-end residual value is $12,000. By leasing, you only pay for the difference, $25,000 minus $12,000 = $13,000 plus finance fees and tax. Now, if you have a trade-in vehicle worth $8000, the difference becomes a much smaller $5000. With the trade-in your lease payment (for a typical lease) would drop from about $393/month to $175/month. A more valuable trade-in, or less costly new vehicle, would reduce your monthly payments even further.

4. Pre-Paid Lease – A pre-paid lease is one in which all lease payments are paid up-front in cash. This eliminates the hassle of making monthly payments. Since very little money is saved it’s more a matter of convenience than financial benefit. If you like having a new car every 2-4 years and have the cash, leasing requires a smaller cash outlay than buying. For example, if you are buying a $25,000 car, you’ll need $25,000 cash. If you pre-paid a 36 month lease, your cash outlay would only be about $14,000. If you then acquired another new car at the end of 3 years, your outlay would be another $14,000 (assuming same price, term, etc.). If you had purchased, you would have to sell or trade your old car (at dealer wholesale price), then pay the remaining cash for your new car. Theoretically the difference should be about the same either way, however lease-end residual prices are typically higher than dealer wholesale prices, and the advantage generally goes to leasing.

5. Pre-Paid Lease with Valuable Trade-In -  If you have a valuable trade-in vehicle that is worth at least the amount of cash needed for a pre-paid lease, you can trade your vehicle and drive a new vehicle payment-free for the term of the lease. At lease-end, you’ll have the usual choices of returning the vehicle or buying it. This is a good option if you want/need to upgrade to a new vehicle and would like to continue having no monthly payments.

If you don’t understand how car leasing works or don’t know if leasing will work for you, please see LeaseGuide.com for all the information and advice you’ll need.

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