Car lease finances
Unlike car finance, that finances the purchase of a car, the
car lease finances the use of a car, truck or van extending over a period of time. This concept is different from renting. A car can be rented for a day or few hours of the day but the minimum period of leasing is 2 years.
Steps
First the lessee needs to negotiate the purchase price of the car with the dealer.
Once the price is decided upon, the dealer sells the car to the leasing company at this price. Hence the dealer basically mediates the contract between the lessee and the leasing company. This service provided by the dealer to the leasing company earns him commission.
After the lease contract is signed the lessee is supposed to make monthly payments, keep appropriate insurance, pay vehicle taxes and licensing fee, and maintain the vehicle avoiding any damage.
At the end of the leasing contract the buyer is supposed to return the car to the leasing company allowing for normal wear and tear. Any other damage other than this has to be paid for. The lessee also has to pay for any mileage that exceeds the committed level in the contract. The respective individual can also opt for buying the car at a specific price level. But due to the equity value that is attached to the vehicle it is recommended not to give back this value to the leasing company.
Lease Payments
Lease payments are composed of depreciation charge and a finance charge.
Advantages
The monthly payments are 30%-60% lower than any purchase loan extending over the same time period.
Since the monthly payments are low, one can use new brands of cars, every 2-4 years.
If the lease terms coincide with the warranty period of the car then any damage would be automatically taken care of without worrying the lessee.
There is no need to pay sales tax for the entire value of the car but for the usage value only.
There is no concern over selling an used car since at the expiry of the contract it required to return the car to the leasing company.
Two kinds of
car lease finance exist and they are
Closed End Leases: Here the lessee can return the vehicle at the end of the lease term to the leasing company. He has no other responsibilities rather than paying for any excessive damage or mileage.
Open End Lease: This is used by big business houses. Here the lessee can bear all financial risks the business houses are large enough to bear such cost burdens.