|This article relies largely or entirely upon a single source. (January 2009)|
Vehicle leasing is the leasing (or the use of) a motor vehicle for a fixed period of time at an agreed amount of money for the lease. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a method of acquiring (or having the use of) vehicles for business, without the usually needed cash outlay. The key difference in a lease is that after the primary term (usually 2,3 or 4 years) the vehicle has to be returned to the leasing company for disposal.
Vehicle leasing offers advantages to both buyers and sellers. For the buyer, lease payments will usually be lower than payments on a car loan would be, and qualification is often easier. Any sales tax is due only on each monthly payment, rather than immediately on the entire purchase price as in the case of a loan. Some consumers may prefer leasing as it allows them to simply return a car and select a new model when the lease expires, allowing a consumer to drive a new vehicle every few years without the responsibility of selling the old vehicle, or possible repair costs after expiry of the manufacturer’s warranty. A lessee does not have to worry about the future value of the vehicle, while a vehicle owner does. For a business lessor there are tax advantages to be considered.
For the seller, leasing generates income from a vehicle the seller still owns and will be able to lease again or sell through vehicle remarketing once the original (or primary) lease has expired. As consumers will typically use a leased vehicle for a shorter period of time than one they buy outright, leasing may generate repeat customers more quickly, which may fit into various aspects of a dealer’s business model.
Leasing’s average retail market penetration rate in the United States for new passenger vehicles reached an all-time record high of 26.5% in February 2014. This represents a recovery from a severe drop during the financial crisis of 2007–08. The prevalence of leasing in the United States is lower for vehicles manufactured in North America, and reaches above 50% for two German manufacturers.
Lease agreements typically stipulate an early termination fee and limit the number of miles a lessee can drive (for passenger cars, a common number is 10,000 miles per annum though the amount can be stipulated by the customer and can be 12,000 to 15,000 miles per year). If the mileage allowance is exceeded, fees may apply. Dealers will typically allow a lessee to negotiate a higher mileage allowance, for a higher lease payment. Lease agreements usually specify how much wear on the vehicle is allowable, and the lessee may face a fee if that amount of wear has been exceeded. A lease with maintenance (commonly known in the UK as Contract Hire) can include all vehicle running costs excluding fuel and insurance.
The actual lease payments are calculated in a very similar way to loan payments, but instead of an APR, the company uses something called the money factor.
At the end of a lease’s term, the lessee must either return the vehicle to or buy it from the owner. The end of lease price is usually agreed upon when the lease is signed.
- Hire Purchase and Rent-to-own
- Closed-end leasing
- Installment plan
- Business Contract Hire
- Chattel mortgage
- Novated lease
- Cross-border leasing
- Personal Contract Purchase
- “J.D. Power Reports: Auto Buyers Are Committing To Leasing And Long-Term Loans At Record Levels”. J.D. Power, McGraw Hill Financial. 2014-02-06. Retrieved 2015-02-20.
- “2014 Used Car MarketReport” (PDF). Manheim Consulting. p. 24. Retrieved 2015-02-20.
- “FRB: Leasing Guide”. Retrieved 2007-06-19.