The practice of leasing equipment and vehicles has been used in business for many years but consumer car leasing has only recently become popular.
Car leasing provides a way for you to drive the car that you want and may not otherwise be able to afford. When you lease a car you are actually paying for the expected depreciation in the value of the vehicle and for the cost of the finance.
The depreciation in value of the vehicle is based upon the initial cost, the expected mileage that will be accrued and the time period of the lease. The cost of the finance to you will be the interest that would be due on the capital cost of the car over the period of the lease.
For example, if you were to take out a car leasing contract on a £20,000 car over a period of two years then your monthly lease payments would cover the interest on this amount. At the end of the lease period you return the car but, of course, it will have depreciated in value. You will have paid for that depreciation, along with the interest, through your monthly lease payments.
Car leasing firms are able to negotiate significant discounts with their suppliers, due to the number of new vehicles that they handle. These discounts mean that the true capital cost of each vehicle, to the car leasing firm, is much less than the current forecourt price. This of course means that the effective ‘loan’ that is provided to car leasing customers is lower, the interest on this loan will therefore be lower and the depreciation costs will also be lower. These factors combine to provide customers with some incredibly attractive car leasing packages.
Car leasing is a sensible and viable option for many people, but not all. If you are considering leasing rather than buying you are advised to get some quotes from multiple car leasing firms and ensure that you have accurately assessed your anticipated mileage.
5 Responses to “How Car Leasing Works”
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November 14th, 2008 at 2:12 pm
[...] This post over at carleasingchatter has finally answered my question: How Car Leasing Works [...]
November 14th, 2008 at 2:52 pm
[...] The cost of the finance to you will be the interest that would be due on the capital cost of the car over the period of the lease. For example, if you were to take out a car leasing contract on a £20000 car over a period of two years … Original post [...]
November 18th, 2008 at 10:36 am
My father always leased his cars, but I never really considered the leasing option because I didn’t really understand how it worked. This is a bit helpful, and puts it in better perspective, but what happens when unexpected damages happen to the car, like a car wreck? How would that effect the lease?
March 26th, 2009 at 1:10 pm
It’s an interesting concept but I think it’s only worthwhile to those who can afford a new car every few years - in that case the depreciation losses are far greater than what you end up spending on a lease contract.
August 10th, 2009 at 10:38 am
I have leased and bought in the past. The balance often depends on how many miles a year you will post. If you exceed the agreed annual mileage the excess costs per mile can be excessive.