How Does Leasing a Car Work?

How Does Leasing a Car Work?

Posted on August 20, 2015

Many people have asked us how leasing a car really works. The best way to understand it
is that leasing a vehicle is based on paying for how much that vehicle
depreciates during the time of your lease.

Once you understand a few terms, it's easy to understand and find the best leasing deals out there.  Leasing a car, truck or SUV works on the concept that you are simply paying for the cost of a vehicle's depreciation during your lease term. In this way, it is very different from renting a vehicle. Depending on the brand and model of the vehicle that you will be leasing, the monthly lease payment can hugely vary. This is due to the differences in how quickly or slowly various makes and models depreciate.

On the whole, the brands that depreciate the least are those that are made in Japan and Europe. Makes such as Toyota, Honda and Volkswagen, therefore, have really low depreciation and are considered good deals when leasing their models. It is very useful to know the terminology used in car leasing before you lease a vehicle. Some of the most common terms are:

Capitalized Cost
Also known as Cap Cost, this is the vehicle price.

Capitalized Cost Reduction
The Capitalized Cost Reduction refers to whatever you trade in or pay down or get a discount for, in other words anything that brings down the capitalized cost.

Depreciation
Depreciation is how much your vehicle goes down in value during the term of your lease.

Disposition Fee
In some cases a fee is charged when you return the vehicle and walk away, and this fee is stipulated in the lease.

Manufacturer's Suggested Retail Price, or MSRP
This is the total price for a vehicle and includes the destination costs, and options – in fact this price includes everything except the dealer's fees.

Money Factor
This term refers to the cost of leasing; it is similar to the cost of borrowing in a traditional loan scenario.

Rent Charge
This refers to the actual interest on the lease, and is sometimes referred to as the Lease Charge.

Residual Value
The Residual Value is the approximate value of the automobile at the end of the lease. If the car is considered to be worth more at the end of your lease, then your lease payments would typically be lower. Although banks and leasing firms have access to data based on the historical resale value of an automobile, the residual value is based on a projection of what the value will be in the future.

Total Monthly Payment
This refers to the payment that you would make every month on your vehicle lease. The best leasing deals are considered to be those that have the highest residual values, because the lease payments are lower and there is a perceived increase in value of what you get for what you pay. Some experts recommend that a three-year lease where the residual value is more than 50% of its original manufacturer's suggested retail price, is a good lease.

Contact us  to find out more details about leasing your next vehicle. We'd be happy to help!