UNDERSTANDING CAR LEASING TERMS – Part 1

With more people choosing a lease over a loan than they did just a few years ago, the boom in leasing isn’t stopping anytime soon. It became a flexible and innovative model of vehicle ownership. Since leasing a car is smart, you need to be aware of car lease terms.

If you choose to buy a car, you pay for the entire value of a vehicle and if you choose to lease a car you only make monthly payments for a portion of a vehicle’s total value, which is the portion that you use during the time you’re driving it. In other words, you’re paying for the vehicle’s depreciation throughout the lease term. 

What is the difference between buying and leasing?

The biggest difference between buying and leasing a car is ownership. Buying a vehicle gives you complete ownership to do what you want with it, while leasing a vehicle gives you temporary ownership with restrictions on what you can do with it. Signing the lease contract you don’t have to worry about fluctuations in the car’s trade-in value or go through the hassle of selling it when it’s time to move on.

Leasing has some peculiar terms describing important factors that affect your lease cost. Understanding leasing terms can help you demystify this process. We will have a look at some keywords and their definitions. Tired of reading? Our lease expert will explain all the details of your free consultation.

Calculating your own lease payment may be a good way to make sure you are getting a good deal. Though doing it to the penny is hardly possible: Taxes and fees will differ in each particular case and some fees can vary from brand to brand. But you can get pretty close. One of the reasons that leasing a car can be confusing is that it has a vocabulary that’s different from terms you use with car buying. To know that you need to go through the terms you will use.

1.    Depreciation

When you buy a car, you buy the whole thing. When you lease a car, you’re buying the difference between the negotiated sale price (including fees) and the predicted amount that it will be worth at the end of the lease term. This difference is named depreciation and will play an important part in your calculations.

2. MSRP

This abbreviation stands for “Manufacturer’s Suggested Retail Price” meaning the purchase price that a vehicle’s manufacturer recommends it be sold for at point of sale. It is also called a “sticker price” as it appears on the vehicle’s window sticker. The residual value of the vehicle is based on this number.

3. Residual Value

The amount that the car is expected to be worth at the end of the lease is called its residual value. Your residual value is based on your parameters. First is the number of miles per year you agree to drive, which is typically from 10,000 to 15,000. Second is the term of the lease and it is up to you to choose while normally it may be 24 or 36 months and more. . Depreciation and Residual go hand in hand – if you know one, you can calculate the other.

MSRP – Depreciation = Residual Value 

If we take as an example a car for $30,000, after 4 years, the depreciation on the car is $20,000 – therefore, the residual is $10,000. The residual value is set by independent companies, such as ALG (formerly known as Automotive Lease Guide), who are experts at estimating the future value of automobiles.

4. Money Factor

While traditional vehicle financing includes an interest rate, leases include a money factor, which is not quite the same as an interest rate. The lease money factor represents the compensation you pay to the leasing company for the risk they take by trusting you’ll make all lease payments on time. The money factor can be translated into the more common annual percentage rate (APR) by multiplying the money factor by 2,400. Visibly, a lower money factor means lower payments. You may use the table to do your calculations easier.

5. Drive-Off Cost

The amount of money you need to pay to begin the lease is called the drive-off cost. It normally includes Acquisition Fee, Security Deposit, and lease fees. Some people who want to reduce the number of their monthly payments will also make a cap reduction payment. Our Part 2 gives a detailed description of other car lease terms and an example of the calculation of your lease deal. We will cover the notions of Capitalized Cost, Cap Cost Reduction, GAP Insurance, Security Deposits and give some tips on defining your best deal.

Leasing a car eliminates a great amount of hassle you naturally face when buying the same vehicle. You can get your new car with lower monthly payments and drive it off the same day you sign the contract.

When you choose to lease an auto you save your money and time.

Car leasing company Grand Prix Motors allows you to lease the car of your dreams without negotiating prices inside a dealership. It’s not only more convenient to lease a car online; it also gives you the chance to take advantage of car lease specials offered on the website.

Let your personal lease expert walk you through the whole process and offer you the best deal.

#enjoy your freedom with Grand Prix Motors!

Related articles

• LEASING A CAR AND SHARING ECONOMY
• CAR LEASING CALCULATOR: YOUR FIRST DEAL