The usual way to go about when purchasing a car is by taking out a car loan. However, did you know that there’s another option with lesser monthly repayments?
A car lease is an arrangement that you have with the lender. With this setup, you pay for temporary ownership of the vehicle for a fixed period and a specific amount.
This option is typically employed by businesses to obtain company vehicles without spending the necessary cash outlay. The primary difference between a lease and a loan is that, with the former, you have to return the car to the leasing company or complete its purchase for the remaining value.
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Meanwhile, here are some things that you should consider before signing a lease contract:
1. Down Payment
One advantage that leasing has over buying a vehicle is that it requires minimal to no down payment. It’s the perfect setup for businesses that need a company car, but don’t have the cash yet to pay the initial fee.
Leasing also requires lower monthly repayments, which means that business owners can deduct the expense from their sales each month rather than a one-time payment. As long as you take good care of the car and don’t go beyond the specified mileage at the end of the term, you won’t need to pay additional fees for the lease.
2. Capitalization Cost
The capitalization or cap cost pertains to the total amount that you have to pay for the car lease. It includes the negotiated price of the vehicle as well as additional fees and taxes that are involved in the process.
A cap cost may also include the acquisition fee. However, there are times when you’re required to pay it in cash upfront, depending on the leasing company’s terms.
You can also avail of a cap cost reduction, which is just also known as a down payment in a regular car loan arrangement. It pertains to cash payments and trade-in credits that lower the amount for financing. This fee is a type of prepayment, not a deposit that you get back at the end of the lease period.
3. Interest Rate
Remember that you can bargain for the best annual percentage interest rate (APR) to get the most bang for your buck. To figure out the real APR, you have to check the “money factor” listed on the leasing agreement.
If the factor is displayed in decimal form, you have to multiply it by 2,400 to get the real APR. For instance, if you have a money factor of 0.005, the interest is actually 12 percent per annum.
On the other hand, if the factor is shown as a whole number, you only need to multiply it by 2.4. So, a money factor of 4.5 would result in an APR of 10.8.
Knowing the actual APR can help you negotiate with the leasing company for the best interest rate. The fee is added to the sum of the adjusted cap cost and residual value.
While it may seem as if you’re being charged twice, you ought to remember that you’re compensating the company for the use of the car as well as the money that they lent you. Typically, this fee is shown as a finance or rent charge.
4. Mileage
Aside from determining the APR that will be added to the final lease amount, you should also watch out for the mileage restriction. Typically, leasing companies have a limit of about 12,000 miles per year. You may end up paying additional costs at the end of the lease period when you go beyond that level.
5. Maintenance
You also have to make sure that you take good care of the vehicle once it’s in your hands. While leasing companies understand that used cars go through normal wear and tear, these organizations will charge you if you return it with dents, scrapes, and even stained upholstery.
Keep in mind that you’re generally not allowed to modify the car you lease unless the changes are easily reversible.
Conclusion
A car lease is a practical alternative to buying vehicles. You can acquire an automobile with little to no down payment and lower monthly repayments. If you’re thinking of going for this arrangement, consider the cost, interest rate, as well as mileage and maintenance terms stipulated by the lender.