Part 1: What is Leasing a Car, What is the Monthly Payment, How Does Leasing a Car Work
Part 2: What are the Pros and Cons of Leasing a Car, Is Leasing Right for You
Introduction to Leasing a Car for Kids and Teens
This video explains the concept of leasing a car in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about leasing a car, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.
Suitable for students from grade levels:
- Elementary School
- Middle School
- High School
The topics covered are:
- What is leasing a car
- Cost of leasing a car: How expensive is a car lease
- How does a car lease work
- What are the advantages of leasing a car
- What are the disadvantages of car leasing
- Is leasing the right choice for you – should you lease a car
What is leasing a car?
Leasing is a way of financing a car, that’s different from a car loan.
Leasing is a type of long-term car rental – for around 2-3 years, usually offered by a car dealership.
During this time, you make monthly payments and after the term is over, you can either renew the lease, purchase the vehicle, or give the car back to the dealer.
How expensive is leasing a car?
Leasing a car usually has significantly lower monthly payments than buying it through an auto loan, because you’re only paying for the right to use the car and won’t actually own it at the end of the lease.
The exact monthly payment primarily depends on the car’s projected depreciation over the course of the lease term and the interest rate charged – which is determined by your credit score. It also includes some taxes and fees, although they are relatively a smaller portion of the monthly payment.
The monthly payment also depends on the lease length – generally, the longer the lease, the lower the monthly payment.
How does a car lease work?
A car lease is an agreement between the lesser (the company that owns the car, which is usually the dealer) and the lessee (the person using the car).
It specifies the terms of the lease including the duration, monthly payment, car’s current value and its residual value at the end of the lease, mileage allowed, penalties for exceeding mileage limits, rule for early termination, excessive wear and tear charges, options at the end of the lease, etc.
Once you have chosen the make and model of the car you want to lease, you shop around to find the dealer that offers you the best terms.
Remember, every single aspect of the lease agreement is negotiable and the higher your credit score, the more bargaining power you have. Once you negotiate and finalize the terms of the lease, you submit an application and provide necessary documentation.
Once approved by the dealer, you sign the lease and can begin using the car. Usually there is no down payment needed. You just have to make the first monthly payment and possibly some additional fees.
If you would like to purchase the car after the lease term is over, you can usually do so by paying the residual value, which is the car’s original price minus depreciation.
What are the advantages of leasing a car?
The main advantage of leasing a car is that it allows you to switch cars every 2-3 years with little hassle, which allows you to always drive newer cars with the latest technology and features.
In addition, leasing has a lower monthly payment than buying a car and usually does not require a down payment. So for a given monthly payment, leasing allows you to enjoy a more luxurious car than you could afford to buy.
Most leases cover maintenance and repairs, usually under manufacturer’s factory warranty. So not only will you get to drive a car in great condition throughout your lease term, you will not have to worry about the cost of upkeep.
If you need the car only for a few years, leasing involves much less hassle because you don’t have to worry about selling the car when you no longer need it.
What are the disadvantages of car leasing?
The biggest disadvantage of leasing is that you are not building up any ownership: during the time you lease, you are simply paying for the right to use the car and won’t own anything at the end of your lease.
Also, unlike buying a car, you’ll have to keep making monthly payments as long as you use the car, making it a lot more expensive in the long run.
In addition, lease agreements can be quite restrictive in terms of the mileage limits, or any customizations to the car. Violation of the terms can result in hefty fees related to excess mileage and wear and tear.
There might also be restrictions on taking the car with you if you move to a different state.
The monthly payment is determined primarily by the depreciation, which is the highest when the car is new. This means if you lease a new car, you would incur very high monthly payments.
Getting out of a lease before the term ends can be quite difficult and there will be an early termination penalty if you decide to end the lease early.
Is leasing the right choice for me – should you lease a car
If you’re someone who always wants the latest technology and likes to switch cars every few years, doesn’t want the hassle of owning and maintaining a car, or is looking for a car for the short term, leasing is the clear choice.
However, buying a car – whether through a loan or outright – and keeping it for 10+ years will always be less expensive than leasing, so it’s the better choice for the majority of people.
What are the main differences between leasing and buying a car?
That’s a topic for another time.