In a typical automobile lease, a car dealer will handle the leasing process on behalf of the leasing company. The dealer sells the car to the leasing company, which then leases it to you for a fixed term, which is often three years. Your lease repayments pay for the depreciation in the vehicle's value, typically set at 50 percent. At the end of the lease term, you hand the car back to the leasing company, or purchase it outright.
When you lease a vehicle, one advantage over buying the vehicle is that lease payments are typically lower than loan repayments. Usually, you do not have to make a down payment for a lease contract. If you take out a $20,000 loan to buy a new car, you have to pay back the full amount of the loan plus interest. When you lease a vehicle, your repayments only need to cover the depreciation of the vehicle over the term of the lease, so you are only paying for 50 percent of the vehicle's value, which in this case is $10,000. However, at the end of the lease period, you do not own an asset, which you would do if you had taken out a loan to buy the vehicle outright.
New Vehicle Replacement
When you lease a vehicle, you can hand the vehicle back to the leasing company when the lease term ends and you can lease another new vehicle. You never have to suffer the depreciation cost of owning the vehicle, and you never have to deal with selling an existing vehicle before acquiring a new one. This means that you can drive a new vehicle regularly, while making lower payments than you would if you were purchasing a car with a loan.
One disadvantage of leasing a vehicle over buying it is that the leasing company usually commits you to a strict schedule of maintenance. This will typically follow the manufacturer's recommended maintenance schedule. If you do not maintain the leased vehicle to this schedule, then you may have to pay a financial penalty when you hand the vehicle back at the end of the lease. If you have purchased the vehicle, you can decide your own maintenance schedule at no financial cost to yourself.
If you terminate a lease early for any reason, most leases will have an early termination penalty clause that you will have to pay. This locks you into keeping the vehicle until the end of the lease term, even if the vehicle is no longer suitable for your requirements. If you have purchased a vehicle, you can sell it at any time and replace it with a more suitable vehicle. Some leases have clauses that trigger a termination of the lease if the car is involved in an accident. If this happens, you have to pay the remainder of the lease, and this is not usually covered by your vehicle insurance.