Five Point Capital, Understand Car Leasing Payments - The Easy Way<br><br><br><br><p>Thousands of people lease cars every year but only a small
percentage understand how leasing really works. In fact, leasing is
often misunderstood to the point that it is often considered a scam or
evil plot on the part of car dealers.</p><p>Leasing is actually a
simple concept and one that has been around in the commercial equipment
business for 75 years or more. However, consumer leasing of automobiles
has only been popular since the 1970's. As car prices increase, the
interest in leasing increases because it offers a less expensive way to
drive the car that a consumer would not otherwise be able to afford.</p><p>Car
leasing is a way to finance the use of a vehicle over a period of time.
It's similar to renting, but not quite the same thing. With leasing,
you pay for two things: (1) expected depreciation in value of the
vehicle over the life of the lease, based on the number of miles you
expect to drive, and (2) finance charges that amount to interest on the
money that the lease company has spent on the purchase of the vehicle.
The lease company is "lending" you the money they have tied up in the
vehicle. The longer you drive their vehicle, the longer their money is
tied up and can't be used for other purposes, and the more you pay in
finance charges.</p><p>Let's assume, to keep things simple for the time
being, that you lease a $25,000 vehicle that will not depreciate in
value over the life of the lease, regardless of the number of miles
driven. The vehicle will be worth as much at the end of the lease as at
the beginning — $25,000. This is not realistic, but let's go along with
it for now.</p><p>In this case, you will pay nothing for depreciation.
If this was the only thing you paid for in a lease, this lease would be
free. However, the lease company spent $25,000 to buy the vehicle and
lease it to you. They are actually loaning you the vehicle — and
loaning you the $25,0000 so that you can drive their car. Therefore,
they expect you pay them interest on that loan, which is how they make
their money. This is like any loan, credit card account, or home
mortgage.</p><p>Since you only pay interest on a leased car, leases are
actually like interest-only home mortgages, which have been exploding
in popularity in the last few years. You don't pay any on the principal
to reduce the amount you owe. You only pay the loan company for the use
of their money.</p><p>In our ideal car leasing situation, you pay
interest (called "money factor" or "lease factor") on the entire value
of the car for the life of the lease. In our example, this is $25,000.
If the lease term is 3 years, you pay interest on this amount every
month for three years, and then return the car to the lease company,
which is the same as repaying the principal on your loan. This ends the
lease.</p><p>Now, in real life, leases are a little different than our
"ideal" lease. All cars depreciate in value from the moment they are
driven off the dealer's lot. The more miles they are driven, the less
they will be worth at the end of the lease. This means that our $25,000
car will only be worth, say, $13,000 at lease-end. Therefore, when you
get to the end of your lease and return your car to the lease company,
you are only repaying the lease company $13,000 of the orginal $25,000
that you "borrowed" from them. Over the life of the lease, you must,
therefore, not only pay interest as described above, but also pay for
the $12,000 that was lost as a result of depreciation. If you drove
more miles than expected, or damaged the car, it's value has
depreciated even further, and you are expected to pay for that as well.</p><p>In
summary, leasing is simply an alternative method of financing the use
of an automobile. It makes perfect financial sense. However it is
frequently misunderstood and declared as an evil plot by dealers to
take customers' money. This is not to say that leasing is the right
choice for all automotive consumers. It's not. It's also not to say
that dealers don't take advantage of customers' lack of knowledge about
leasing. They do. This is why automotive consumers should take the time
to learn about leasing, how it works, and how to spot dealer abuses. is a good starting point.</p><p>Copyright 2005 Al Hearn and LeaseGuide.com</p><p>Al Hearn is founder, owner, and operator of . This web site has helped thousands of automotive consumers since 1995.
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