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Q: What is an Auto Lease?

December 17, 2013 12:53 PM

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An auto lease generally allows you to use a vehicle that is owned by another party in exchange for regular payments. This arrangement is a common alternative to purchasing a vehicle because the monthly lease payment will often get you a nicer vehicle than a monthly purchase payment -- the difference is that you don't own the vehicle at the end of the lease term. An auto lease offers advantages and disadvantages for both parties.

A lessee is the party who uses the vehicle under the terms of the leasing contract, while the lessor actually owns the vehicle. Auto leases are typically closed, meaning the lease lasts for a fixed period of time.

Dealers often offer leasing as an alternative to purchasing a vehicle. Leasing is most common for businesses, but individuals also lease vehicles. This allows the lessee to use the vehicle without requiring the initial outlay of cash that a purchase requires. Cars are available with the same car options, whether you lease or buy the car.

The lessee must return the vehicle to the lessor at the end of the lease's term. The term of the lease is usually two to five years, although car dealers may also set up leases with slightly longer terms. This contrasts with a purchase plan, in which the purchaser owns the vehicle at the end of the purchase plan's term.

A lease typically includes additional restrictions that are not part of purchase agreements. Leases usually specify a fee that the lessee must pay to the lessor in the event the lessee wishes to terminate the lease before the end of its term. This fee is commonly known as an early termination fee. A lease also places a maximum limit on the number of miles the lessee may drive the vehicle. The most common mileage restriction for a leased passenger car is 10,000 miles per year, but leases may also have mileage restrictions of 12,000 to 15,000 miles per year.

Some benefits to leasing include that it is often easier to qualify for a car lease than for a car loan. Some consumers also prefer to always have a late-model car without needing to sell the old car. A lease allows these consumers to return the car when the lease expires and lease a new model.

An additional benefit of leasing is that a lessee does not need to be concerned about the future car value. Future value is often a matter of prime concern for a car buyer. The main benefit of leasing for the lessor is that it provides a source of income.

A car can often be leased again after the first lease expires.

Loans and leases often appear similar to the consumer because both financing options require him or her to make regular payments. However, it is important to understand the significant differences between these options when deciding to lease or buy a car. Leasing and buying also offer different sets of benefits for the car dealer.

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