Understanding Your Car's Lease

In addition to buying a car with an auto loan, a cars lease is also a viable option for many. Car leases are a great option for many people as they can lease a car without a downpayment, pay small monthly payments and have the freedom to drop the car off after the lease has expired.

While a car lease is very convenient, they can also be complicated iwhen trying to understand them. Here are a few tips to help you understand the different nuances of a car lease.

Payments Are on the Depreciation

When you make payments on the car, you are actually paying for the time that you have the car. This is called depreciation. For example, if you take out a lease on a car that is valued at $20,000 for 4 years you will be paying on the amount that it actually depreciates. If that means the car will only be valued at $12,000 in 4 years, you will be paying payments on $8,000 not the $20,000.

Closed or Open-Ended Leases

Before you sign the lease contract make sure you know which type of agreement you are entering into. There are two types of lease agreements; the closed-ended lease and the open-ended lease.

A closed-ended lease is the most popular, and most flexible. With a closed-ended car lease you have the option to buy the vehicle at the end of the lease agreement. If you do not choose to buy the vehicle at the end of the term, you can simply walk away from it.

An open-ended lease does not give you an option. This type of agreement requires that you purchase the vehicle at the end of the lease agreement. The price you pay is the projected value. For example, is the car will be valued at $12,000 at the end of the agreement, then this is the price you will have to pay. An open ended lease, however, will offer a lower monthly payment if that is what is needed at the time. This can be an expensive option if the cost of the car is more than the actual fair market value.

Understand Fees

Look at the contract very closely to see if there are any types of fees associated with the lease. If, in the event, you want to terminate the contract you might have to pay the remainder of the contract, or a fee for terminating the lease. Also pay attention to the mileage limit. Your contract will be specific as to the amount of mileage, and wear and tear, that is allowed on the car. If you go over on these then you will be required to pay more at the end of the contract.

Understand Your Insurance

Before signing your contract look into what your insurance will pay and what it will not. In the event of an accident, some insurance companies will not pay the outstanding balance on the lease because of the depreciation and fair market value is less than the actual remaining cost of the car.