Leasing how does it work
Best Answer: Leasing can be good for the right people.
Essentially, in a lease, you never "own" the car. You make payments for 2-3 years, then hand the car back. Think about it almost like a long-term rental.
If you purchase a car on a conventional 'buy' contract, but trade it off before you are done paying for it, you never *owned* that car either. If you routingely trade out of cars every 2-3 yrs, you never *own* them at all. You are just moving from one monthly payment to another.
Dealers make no more on a lease than they do on a purchase. The cap cost of the car is the same as the 'buy' price. A lease customer has no need to buy extended warranties or any other extras - in fact lease companie usually don't allow for them. So we typically make LESS on a lease than a 'buy'. The residual is set by the bank, not us. When the car is handed in at the end of the lease, the dealer is just an agetn for the bank. We don't stand to gain anything on the residual, except hoping you buy another car in teh process.
There are some advantages to leasing under the right circumstances.
First, if you trade out of cars every 2-3 years, it might be right for you. In a lease, you have a contract for a fixed amount of time. I discourage leasing past 3yrs - 2 is better. In a 'loan', after 2 yrs, if you try to trade you will probably be upside down, and owe more than the car is worth. So, in order to get out of it, you have to have a lot of cash, or finance that negative on the next car.
The contract will tell you that your payments are $x per month plus tax. At the end of the term, you will have a residual value for the car. The lease company basically says "In three years, we feel this car will be worth $Y" You have the option to buy the car at the end of the lease for that amount. If you are in love
with the car, or it is worth well above the residual, you may want to consider that. However, in most cases, you simply hand over the keys and walk away.
In a lease, there is a specified amount of mileage. Most leases are constructed around 12K or 15K miles per year. If you go over the mileage, there will be a per-mile penalty at the end of the lease. So, if you drive a lot, it may not be for you.
Leasing typically allows a person to get a nicer car for the same payment as a lower-end car on a loan. that is because of that residual. You are only "financing" the difference between sales price and residual. In a loan, you are financing the entire purchase price.
In other words, if a car has a sale price of $25,000. on a three year lease, lets say the residual is $12,500. You are only "financing" $12,500 for 3 yrs. If you were to buy that same car, you would finance $25,000 either for a longer term, or a much higher 36 month payment.
Lastly, in a lease you pay less sales tax. In a conventional purchase on that $25k car, you pay tax on the whole 25,000. In a lease, you pay sales tax on the monthly payment. In other words, your payment of $300/month is actually $300+sales tax. BUT you are only paying tax on the leased amount - in the earlier example you are only paying sales tax on $12,500.
To those who say "never lease" -- read this forum for 30 mintues. For every lease 'horror story' you read, you will see 20 people who are upside down on a 6 yr purchase and no way out. The key is to be thoroughly informed about the pros and cons of both, and make an educated decision based on your needs and lifestyle.
Times leasing is good: You trade cars ever few years, you dont drive more than 12-15k per year, you want to put less down
Times it is bad: You like to keep cars a long time, you drive a lot, you want to put a lot of cash down.Source: answers.yahoo.com