Types of Car Leases

What Is Leasing?

A lease for a new car or truck is a contract to pay for a portion of the vehicle's worth for a limited number of years.

Leasing is a popular alternative to purchasing a vehicle because:

• Monthly payments are often lower.
• Less down payment is required.
• Vehicles are covered under the manufacturer warranty.
  • Extra cost for repairs is usually not a factor.
• It allows consumers to change cars every few years.

If you plan to lease a vehicle in the future, your first step is to determine which type of new car lease will work best for you.

The most common types of vehicle leases are:

• Closed-end leases.
• Open-end leases.
• Subvented leases.
• Single-payment leases.
• “Option to buy" leases.

Closed-End Leases

Also sometimes referred to as a “walk-away" lease, a closed-end lease is the most common type of consumer lease.

The features of a closed-end lease include:

• Agreeing to a lease contract for a fixed number of years.
• Returning the car to the dealership at the conclusion of the lease.
• Keeping up with required vehicle maintenance.
  • Maintenance and repairs are usually performed at the dealership for no additional expense.
  • Failure to keep up with scheduled maintenance may result in additional fees at the end of the lease.
• Staying within the pre-determined mileage in the leasing contract.
  • Going above mileage restrictions can result in additional charges.

A closed-end lease is a popular option because monthly payments are usually low for consumers with a good credit history.

Open-End Leases

Less common than a closed-end lease, an open-end lease is often used by businesses or individuals who travel frequently.

The details of an open-end lease include:

• • Most closed-end leases have mileage restrictions that average 12,000 miles annually, OR 36,000 miles for 3 years.
  • Any additional mileage usually incurs a charge of $0.10 to $0.15 per 1 mile.
• Monthly payments may be higher than a closed-end lease.
• Requires you to pay for the depreciation of the vehicle at the end of the lease if it is below market value.
  • Market value is the pre-determined value of the vehicle at the end of the lease contract.
    • EXAMPLE:
    • A $25,000 car has an estimated market value of $18,000 at the end of a lease of 3 years.
    • At the end of the lease, the vehicle is actually only worth $15,000.
    • You're responsible for paying the $3,000 difference.
  • Excessive wear or mileage may cause a vehicle to depreciate faster.
  • If the leased car doesn't depreciate, you may not be required to pay additional fees.
• This option can be a riskier option for some buyers because the end price is unknown.

Subvented Leases

A subvented lease is a special lease offered by the finance company associated with a particular manufacturer. These leases are often offered when automakers need to move inventory quickly, or for particular models in low demand.

The features of a subvented lease include:

• Low interest rates.
• May only be available to consumers with excellent credit scores.
• Low estimated depreciation.
  • This lowers the monthly payment.
    • EXAMPLE:
    • You find a $20,000 car that would normally be worth $10,000 at the end of a lease of 3 years. You would pay $10,000 divided by 36 months (length of lease contract).
    • Because you have stellar credit, you're offered a subvented lease.
    • Now, the same $20,000 car is estimated to be worth $12,000 at the end of the lease. You'll pay $8,000 (instead of $10,000) over 36 months.

Though you may not always be able to find the particular model vehicle you're looking for, if you qualify, subvented leases can save you a lot of money.

Single-Payment Leases

If you have plenty of cash up front and would rather lease than purchase, a single-payment lease might be a good option. With a single-payment lease:

• You pay the entire sum of the lease when the lease contract is signed.
  • Gets rid of monthly payments.
  • May help to eliminate most of the monthly interest.
• Finance rates are significantly lower.
• You are approved for a lease much easier.
• You may be able to negotiate a lower purchase price.
  • Paying up front is less risky for the dealer, so you may get a better deal.
• You know all the costs up front.
  • Sometimes hidden fees and interest rates can make your monthly payments balloon to a rate higher than what you expect.

“Option to Buy" Leases

Some new car leases have an option to purchase at the end of the lease contract. In order to purchase the vehicle, you'll need to:

• Make sure the “option to buy" price is negotiated and listed in the lease contract before you sign it.
• Determine whether the negotiated price is higher or lower than the vehicle's market value.
  • If the vehicle's worth has depreciated considerably during the lease, the buyout price you negotiated may be higher than the market value at the end of the lease.
    • If this is true, you may get a better deal by purchasing a similar used vehicle elsewhere.
• Pay cash or finance the buyout price.
  • If you decide to finance, shop for the best interest rate.
    • Often, the dealership will offer you financing for lease-to-own vehicles. Before agreeing to this, make sure you can't get a better deal with a different lender.