What is a vehicle lease?

Leasing is nothing more than another method of financing the use of a vehicle over a specified period of time. It is frequently misunderstood as some sort of “Rent to Own” scheme. But in reality, leasing is a very common financial concept that has been around for decades and can provide a more affordable way to finance your vehicle purchase.  Let me explain the concept in simple terms.

Most people when purchasing a vehicle will go and take out an bank loan to pay for their vehicle.  Today, most auto loans will take up to 7 or 8 years to pay off and unfortunately with constant advancements in technology most people only plan to keep their vehicle for 4 to 5 years.  Therefore, when they go to trade in their vehicle with the dealership they still owe a significant amount of money to the bank on their vehicle that in most cases is more than the market value of your vehicle. This shortfall must be covered by the customer or carried over into a new loan, which creates another loan that is inflated well above the market value of the vehicle.

In a lease, the terms are structured so that you are only making payments on the value of the vehicle that you plan to use. If you intend to only keep your vehicle for 4 years than the market value of your vehicle is calculated (based on driving habits and intended usage) and then this amount is subtracted from the selling price.  You will pay monthly payments only on the difference which can provide you a lower monthly payment.  See below illustration.

Leasing can be the cheapest way to finance a vehicle,  especially when you factor in maintenance and repair  costs that will need to be done on an  vehicle as the it ages. In most cases, you can tailor your lease to coincide with the manufacturer’s warranty which can reduce your unforeseen repairs bills dramatically.