How Does Leasing a Vehicle Actually Work?
Car leasing is a popular alternative to the traditional automotive sales model. Leasing allows buyers to afford more expensive vehicles with a lower down payment and lower monthly costs. The practice was initially intended for businesses and subsequently became prevalent with individuals desiring high-end luxury cars. Vehicle leases make it possible to avoid the difficulties that come with purchasing vehicles and dealing with depreciation at tax time.
When you lease a vehicle, you’re paying for convenience. You choose a vehicle, then negotiate the down payment and monthly payment based on the residual value at the end of the lease. The dealer is betting that the vehicle will maintain (or exceed) that projected value. If the dealer miscalculates and assigns a higher value, you win. If the dealer bets low and the vehicle depreciates less than expected, they come out ahead in the end.
Lease Terms Compared to New Car Loans
Unlike most traditional car loans (which can stretch out to six years or more these days), most car leases are between two and four years. These shorter terms protect the leaseholder’s investment in the vehicle, as they are betting on the depreciation curve. The more months, the more risk, although the steepest depreciation generally happens in the first year.
While car leases allow a set number of miles per year, the final contract calculation is cumulative. For instance, with a three-year lease, you might be allowed 12,000 miles each year, with a lease total of 36,000 miles. The leasing company doesn’t care how many miles you drive in a specific year, only that you stay under the total limit. The most common mileage caps run between 10,000 and 15,000 miles per year. The more miles you travel, the more you’ll pay each month. Always have an accurate assessment of your monthly mileage requirements before entering any negotiation. What you don’t know may cost you.
You are responsible for all regularly scheduled vehicle maintenance when leasing a vehicle. These costs can be offset to a certain extent by manufacturer-provided services like free oil changes, but you will always be responsible for tires. If you turn the vehicle in with bald tires, there’s a good chance that you’ll get billed for their replacement. Be smart and replace your tires on time.
You should always avoid taking out a lease with a term that exceeds the factory bumper-to-bumper warranty to avoid risk. If your leased vehicle needs repair due to a part failure within the warranty period, you don’t have to worry (or pay). But if the warranty has expired, you’re out of luck. You are responsible for repair to the vehicle due to road conditions, parking lot issues, or a collision (other than what is covered by insurance).
Lease terms typically require that you must carry full comprehensive insurance on the vehicle, and they may specify a deductible amount. The lower the deductible amount, the more you’ll pay for insurance. You’ll want to verify the specifics before signing and get a new quote from your insurance company. Some vehicles are more expensive to insure than others.
While you shouldn’t modify a leased vehicle, there are some exceptions to the rule. Anything that can be easily unbolted and replaced with the original part may be acceptable. Swapping for a set of aftermarket alloy wheels, for example, is likely to be okay, because you can remove the aftermarket wheels and reinstall the originals before the vehicle gets turned in to the dealer. Performing serious drivetrain modifications is most likely not okay. You’ll want to read all the fine print on the lease agreement to see if modifications like window tinting are allowed.
You’re Paying for Use of the Vehicle, Not the Vehicle Itself
While driving a leased vehicle can be an ego boost, it’s not the same as a purchase. There is no pride of ownership. You never “own” a leased car unless you buy it out at the end of the lease. Leasing is similar to renting, in this respect, although it requires a (potentially substantial) down payment.
What Happens When You Return the Car to the Dealer?
When your lease term is over, you typically bring the vehicle back to the dealer that leased it to you. The dealer (or leaseholder) will perform a thorough cosmetic and mechanical inspection. The vehicle needs to be in near-perfect condition. If it is not, you will need to pay for repairs to bring it back to tip-top shape. Thankfully, there’s a certain amount of leeway, which is spelled out in the lease terms. While you don’t need to worry about every ding or scratch, they can add up. You’ll want to have the car detailed and take care of any glaring issues before you bring it in for inspection. If the vehicle is in acceptable condition, you should get a deposit back from the leaseholder.
Most vehicle leases allow the lessee to purchase the vehicle at the end of the lease for a set price. Folks that love their leased vehicles and have taken care of them well can take out a conventional used vehicle loan to pay for the purchase. Buying a car, SUV, or truck at the end of a lease can work out in the lessee’s favor if it ends up being worth more than expected.
Traditional Vehicle Leases vs. Canvas Vehicle Subscriptions
Car subscriptions are a fabulous alternative to traditional car leases. Our subscriptions provide peace of mind, remarkable flexibility, convenience, and full coverage. With a Canvas vehicle subscription, maintenance, road assistance, and insurance are all included in the bottom line. You can swap for a different vehicle each month, rather than being locked in with a single vehicle for two, three, or four years. If you’re thinking about leasing your next vehicle, check out our Canvas vs. Leasing post to see how we stack up financially against leasing.