Leasing ensures that you’ll always drive a late-model vehicle, won’t have to pay for warranty-covered repairs and won’t have to bother will re-selling at the end.
How are monthly lease rates determined?
In formulating a monthly payment structure, a lessor is primarily concerned with the extent to which the vehicle will depreciate throughout the lease and the cost of borrowing money to finance the car during that period.
Three key elements:
First, the adjusted capitalized cost is determined. This figure represents the real purchase price after elements such as the down payment, incentive discount and trade-in credit are deducted from the capitalized (actual) cost, while any fees or charges (e.g. destination) are added.
Second, the residual value, or estimated value of the vehicle at the end of the lease, is determined and then subtracted from the adjusted capitalized cost to yield a depreciation figure. The residual value depends on the length of the agreement, expected kilometres and make/model of the vehicle.
Finally, a lessor assesses the money factor, a number that correlates with the cost of borrowing money during the lease period.
While these terms may seem unfamiliar, full disclosure laws now require now requires dealers to publicize all leases’ down payment amounts, lengths, residual values and interest rates.
How do loans and leases differ?
When you take out a loan, all of the money used to pay it off applies to your eventual ownership of the vehicle. The initial down payment and principal on the loan cover the total cost of the purchase. Lease payments, however, apply only to the use of the vehicle. The total sum of payments covers the vehicle’s depreciation over the time you drive it and is usually less than the outright price of the vehicle.
What are the restrictions of driving a “borrowed” vehicle?
Annual kilometres restrictions are a major limitation for customers who choose to lease. Lessors want their vehicles returned in saleable low-kilometer conditions, so they place kilometer caps on them. A typical yearly figure is between 20,000 and 55,000 kilometres. Beyond the established limit, fees accrue on a per-kilometer basis, usually in the range of $0.10 to $0.25 per kilometer. So if most of your driving is local, leasing makes sense. However, if you consistently tack on 500 or more kilometres a week, definitely look into a loan.
What factors determine the purchase price at the end of a lease?
Most leases rely exclusively on the residual value in determining the end of term purchase price. These closed-end deals require you to pay the fixed residual amount regardless of the actual market price. Open-end leases work differently in that the actual market value helps determine the purchase price. As a customer you are responsible for any difference between the residual and actual value when buying outright.
Closed-end leases set a fixed residual buy price at the beginning of the term, while open-end deals base the final buy price on a vehicle’s actual market value at the end of a lease.
Lease agreements usually limit kilometres from 12,000 to 15,000 kilometres annually. Beyond these figures, fees in the range of $0.10 to $0.25 per kilometer begin to accumulate.
If you plan on customizing your vehicle, you need to finance with a loan. Leased vehicles must be returned under factory specification.