What? You leased your car? Why? by Chuck Norlin

Why lease a vehicle? Although a lease is different than a contract, it serves the same purpose; you drive a vehicle and repay some entity while you are doing it. With a contract however, regardless of term, when you make that last payment, the vehicle is yours. Not so with a lease, there is a balance remaining on the lease, a residual, and it is due and payable at a specific, preset, time.

With a lease you are only paying for that portion of the vehicle you use, using a predetermined amount to establish a residual. The true value of a lease is either a lower payment on a like vehicle or more vehicle for the money. Because of the residual, the payment will be considerably less than a contract of sale payment in which all payments combined pay the balance due in full.

Leasing is neither good or bad, what is important is whether or not it works for you. Typically, about 20% of new vehicles are leased, and most of that 20% go to small business owners and professionals who replace their vehicles every three years, take the write off, and appreciate the fixed accounting method to do that.

One downside of leasing is the residual value. At any given time in the lease the vehicle will have zero equity, and in many situations the vehicle will be worth less than the balance owed, creating a potentially costly situation when attempting to dispose of the vehicle prior to lease end.

Considering that most salespeople are not well versed in the workings of a lease, and that most consumers know right at zero about leasing, and considering the early bad reputation of leasing, it is apparent to me why leasing is not the prevalent way of "owning" a vehicle.

And perhaps of greatest impact is that we want to OWN it, not rent it or lease it, OWN it. However, the majority of all vehicles traded to a new vehicle dealership for another vehicle are NOT PAID FOR, which could be a good argument to lease instead of buying.

Having built several successful dealership lease companies, and being a student and teacher of leasing, I am a proponent of individual consumer leasing. It makes sense to pay only for the amount of the vehicle being used, and to know the certainty of when the vehicle will be replaced.

For some however, the flexibility of a contract purchase which allows the owner to trade at will without a contractual penalty is generally the overriding factor, along with the others, in whether to lease or purchase.

The factory incentives are like the factory rebates and the finance rates, some are exceptional, and some are average. Leasing in itself is a simple process with set guidelines and finance equation figures. Each component of the finance equations are linked together, changing one will change everything else.

The benefits to leasing over buying are; 1. Less initial money out of pocket 2. A lower payment 3. More vehicle and generally more options 4. An opportunity to trade sooner (compared to a five year contract) 5. GAP insurance 6. Paying only for the portion of the vehicle you use, the rest is held as a residual Remember to do your homework upfront, even factory lease deals are negotiable at the dealer level. And factory lease deals may be better with an independent lease company.