Financing vs. Leasing
- What is the difference between leasing and financing?
- What are the customer's responsibilities in a leasing agreement?
- What is excess "wear and tear" and excess mileage?
- What should a customer look for when shopping for a lease?
Financing is designed for those want to achieve ownership. Leasing is an option that lets you pay for the portion of a vehicle you expect to use over a specified term, plus a rent charge, taxes and fees.
For example: A person might want a $26,000 vehicle. The vehicle's projected future value (often referred to as the residual value) might be worth about $12,000 at the end of their lease. If the same person purchases the vehicle by utilizing traditional financing his or her monthly payments will be based on the entire $26,000 value of the vehicle and he or she will own the vehicle at the end of their financing term. However, if the person leases the same vehicle, their monthly payments will be based on the amount of the vehicle they expect to "use up" over the lease term. This value ($14,000 in our example) is the difference between the original cost ($26,000) and the estimated value at lease end ($12,000).
With leasing, the length of the lease agreement, the monthly payment and the yearly mileage allowance can be tailored to their driving needs. Keep in mind, with leasing the customer does not own the vehicle, he or she returns it to the dealership at lease end unless they choose to exercise the purchase option as defined in most lease agreements.
They are typically responsible for providing a valid liability and physical damage insurance policy for the leased vehicle. The customer is also responsible for regular vehicle maintenance per the manufacturer's suggested schedule. At Ed Morse, we offer the benefit of including most of the routine maintenance for a minimal additional amount per month.
The customer is also responsible for "excess wear and tear" as defined in the lease agreement. Examples of excess wear and tear vary by lessor but may include broken glass, damage to the body and trim (minor paint chips or scratches are generally not considered excessive), torn, damaged or stained interior, missing parts or equipment, and mechanical conditions that cause noisy, rough or improper operation. Following the maintenance schedule recommended in the owner's manual can usually prevent minor excess wear and tear.
What about excess mileage?
According to the "Automotive Lease Guide" (ALG) lease residuals are based on 15,000 miles per year. Sometimes customers are presented "low mileage" leases that are typically 10,000 or 12,000 miles per year. This may be improper if the customer has said that they'll drive the vehicle the standard 15,000 miles per year.
It is common for a customer to think that if they put a lot of miles on a vehicle that leasing will not work for them. Quite contrary, a lease, if structured properly to account for the anticipated usage can benefit the customer as well. The customer is responsible for any miles driven over the total mileage limit determined in their lease agreement. If the customer knows they'll be driving more miles than normally allowed, and they still desire the benefits of the lease, the leasing company may allow the customer to pre-pay for additional miles up front, usually at a lower per mileage charge then if paid at lease maturity.
- A guaranteed purchase price including the amount of the buyout at lease end.
- Gap protection.
- When an accident, fire or theft results in the total loss of the leased vehicle, there is typically a difference between the customer's insurance settlement and their cost to end the lease agreement. With some leases the customer is responsible for this difference. Nearly every lessor Ed Morse utilizes has lease agreements that provide gap protection to ensure that our customers are not responsible for any additional charges over and above the insurance settlement (except for their insurance policy deductible).
- The option for early termination or return of the vehicle before lease-end.
- (Note: There may be a fee to the leasing company to exercise this option.)