Consumer Auto Digest - Your Best Source for Automotive News
Skip Navigation Links
Featured Articles
Automotive Buyer’s Guide
Car Care
Your First Car
Industry News
Cheapest Gas Prices
Finance Calculator
Quizzes and Games

Valid XHTML 1.0 Transitional

Leasing Simplified
Print this Article

Email to a Friend

Email Us
The concept of leasing can be overwhelming, but after reading this guide, it should be within your grasp. Here is a break down of exactly what leasing means, how it works, and what you need to know. Leasing has a language of its own, so some key words and definitions are located at the end of this article.

Leasing: What is it?

Leasing is one method of obtaining a vehicle for a disclosed time period, after which you may have the option to purchase the vehicle.

Leasing: Advantages and Disadvantages

The advantages of leasing are:
  • Avoiding a large financial commitment to your vehicle
  • Having a lower monthly payment than that of a loan, for the same vehicle
  • Having a full warranty for the term of the lease (Usually 2-3 years)
  • Greater amount of options at end of lease term (Vehicle return, option to buy, sell vehicle through leasing company)
The disadvantages of leasing are:
  • Do not have ownership of the vehicle
  • Do not build up "equity" with a lease, as with purchasing
  • Carrying cost (interest cost) is high if vehicle is kept on lease for a long period
  • Lease can be costly, if not based on a realistic amount of km you will drive
Leasing can be a commitment, because the most inexpensive way to obtain a vehicle is to pay cash. If this is not possible, having a short term when borrowing means a having a lower cost of interest or lower “carrying costs”. Repaying a loan in the least amount of time possible implies a lower carrying cost. Carrying costs are higher for leases than loans with the same term however, because through a lease you are only paying the depreciation of the vehicle, and not repaying the vehicle’s total value.

Leasing: Things You Need To Know
  • Insure Your Vehicle - This should be done regardless of whether you lease or buy. In the case of leasing, you should be sure to have the amount of coverage required by your lease, which may be more than if you were to buy the vehicle.
  • Licence and Register Vehicle - Should you lease, you are responsible for the payment of license and registration fees during the lease term This fee will most likely be greater if you purchase the vehicle.
  • Maintain your Vehicle - Regardless of ownership or lease this is your responsibility in accordance with the vehicle maintenance schedule in the “Owner’s Manual”. You may be exempt form doing so if your lease is classified as “full maintenance”. Those leasing are also responsible for repairing the vehicle. If this is not done properly, you may be charged with “Excess Wear and Tear”.
  • Know Your Rights - An arbitration plan is available to you form manufacturing and leasing companies. Should you qualify for the Canadian Motor Vehicle Arbitration Plan (CAMVAP) the service will assist you with any disputes you may have with the manufacturer concerning manufacturing defects with your vehicle.
Leasing: Types of Leases

Closed-End Leases
A Closed-End Lease involves making a set number of lease payments during the term of your lease followed by the return of the vehicle at the end of term. Additional payments are not required unless there is physical damage to the vehicle, such as an excess number of km driven, outside the set lease limit, or excessive wear and tear. Upon lease closure you may purchase the vehicle or return the vehicle. Typically the majority of leases are considered close-end.

Open-End Leases
An Open-End Lease involves making a set number of lease payments during the term of your lease, as well as subsequent return of the vehicle at the end of term. After this, an adjustment will be made, where you will need to make another payment covering the difference between the actual value of the vehicle at the end of the lease and the “Residual Value” that is on your lease contract. Conversely, if the value of the vehicle is more than the “Residual Value” then you are paid the difference. A example would be, if the residual value of your lease is $9, 200.00 and the vehicle sells for $9,000.00, you are required to make a payment of $200.00. However, if the vehicle was instead sold for 9, 400.00, the leasing company would owe you $200.00.

Leasing: Required Payments
  • Refundable Security Deposit - The majority of leases require you to pay a security deposit that will be refunded at the end of your lease, unless it is used for payments on any remaining amounts you owe.
  • First Payment - Many leasing companies require you to pay the first lease payment.
  • Down Payment (Leased Vehicle Amount Reduction) - A way to lower your monthly payment may include trading in your previously owned vehicle, or paying an amount in cash.
  • License and Registration Fees - You may be required to pay vehicle license and registration fees at the time the vehicle is delivered to you.
  • Possible Acquisition Fee - If in your lease, this increases the “Carrying Costs” of the lease and is included in the Total Lease Charges.
Leasing: Considerations
  • GAP Protection - Included in many leases, should you vehicle be in an accident or incur repair, this protection covers the difference between the remainder owed on your lease and the amount of the insurance settlement, after the deductible.
  • Taking Vehicle Out of Province - You may not be allowed to remove the vehicle form the province or territory in which you leased it, without the prior permission of the leasing company for an extended period of time.
Leasing: End of Lease Options

Purchase Option
One option you have once your lease has expired is to buy the vehicle, if your lease has a purchase option. While there are some leases give you the option to purchase the vehicle at any time, others only give you the option to purchase the vehicle at the end term. Should you opt to purchase the price must be stated on the contract

Early Termination Rights
You cannot end your lease before end of term unless otherwise specified by contract. If specified the lease should also include the required formula for calculating the early termination amount.

Key Lease Terms

Acquisition Fee - covers the cost of preparing and servicing your lease.

Amount to be Amortized - difference between the Net Leased Vehicle Amount and the Residual Value. It represents the Depreciation that you pay over the term of your lease.

Default - occurs when you fail to comply with specific terms of the lease.

Depreciation - the loss in the vehicle's value that occurs over time. The longer you keep the vehicle, and the more you drive it, the more the vehicle will depreciate. Also known as the Amount to be Amortized.

Excess Wear and Tear - over and above expected normal wear and tear. Your lease should describe what excess wear and tear means.

Residual Value - the estimated wholesale Value of you vehicle at the end of your lease.

Featured Articles

Financing Online: Guidelines and the Best Sites Reviewed
Buying a Car Online: What to Look For and a Review
New or Used:The Ups and Downs of Buying a Used Car
Copyright © 2006 All Rights Reserved. Terms of Use | Privacy Policy | Disclaimer | About Us | Contact Us