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Q: What is a Car Lease?

December 17, 2013 12:53 PM

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A car lease involves paying for the use of a vehicle over a period of time. Unlike other car financing arrangements, when you lease a car, you are not purchasing it outright. Car leasing is an alternative to purchasing offered by car dealers. The main difference between buying a car and leasing a car is that at the end of the term, the vehicle must be returned to the dealer or purchased. A common lease term usually lasts three or four years. Restrictions typically apply during the term of the lease, including the amount of miles that the car can be driven per year. When you lease a car, you must also be responsible for maintaining the car. Each leasing company or dealer has its own lease terms.

When you lease a car, you will typically be able to pay lower monthly payments than when purchasing a car. At the same time, there is no equity built in the car. If you do decide to buy the vehicle, it will be necessary to obtain regular car financing because at this point the lease will have been converted into a purchase. Another option would be to return the car and receive another vehicle for a separate leasing term. This can be a good option if you like driving a new car every few years. It is even possible to change the type of car you drive at the end of the lease period.

After you have entered into a lease agreement, you will need to continue making monthly payments until the term of the lease agreement has expired. If you turn in the vehicle prior to the end of the contract, you will owe an early-termination fee under most contracts. In most cases, you will need to pay a nonrefundable down payment when you lease a vehicle. The amount of this payment can vary. You may also be required to submit a security deposit when you lease a car. The security deposit is typically refundable at the end of the lease based on the condition of the vehicle and whether there is any excessive wear and tear. If there are any damages to the vehicle, the security deposit will be applied toward necessary repairs.

The car lease agreement will usually specify the amount of wear and tear that is allowable on the vehicle at the end of the lease period. If you have exceeded the maximum mileage allowed during the lease period, you may also owe additional fees. Some dealers may allow you to negotiate a higher allowance for mileage, but this may also involve a higher lease payment. The value of the vehicle at the end of the lease period after depreciation is known as the resale value. The higher the resale value, the more the vehicle will be worth at the end of the lease period. Although qualifying for a car lease may be easier than regular car financing, you will still usually need to pass a credit check.

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