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 either be returned to the leasing company or purchased for the residual value.
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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. 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 (or manufacturing corporation) 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.
Market penetration
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 2007â€"08. As of 2016, leasing accounted for about 25 percent of total vehicle sales or 31 percent retail sales in the United States.
The prevalence of leasing in the United States for GM, Ford and Chrysler have been rising close to the industry norm since reaching low single digits in 2009, but still lower than BMW and Mercedes-Benz.
Leasing is the second-most popular form of consumer new car finance in the UK after personal contract purchase. The overall value of the personal leasing market grew by 12.7% in 2017 and it now accounts for 9.2% of all point of sale finance provided to consumers for new car purchases, according to the ContractHireAndLeasing.com Personal Leasing Report 2017.
Lease agreement
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.
Typically a leasing company will have a minimum length of lease such as 24 months up-to 60 months. Recently a new view on leasing is that the market has grown for short term lease called 'flexi-lease'. Flexi-lease is when a person can lease a new vehicle for 3 months and then choose to hand the car/van back or indeed extend the lease for another period. This is almost the same as van hire but typically involves the finance or leasing company maintaining and being ultimately responsible for the vehicle.
See also
- Hire Purchase and Rent-to-own
- Closed-end leasing
- Installment plan
- Chattel mortgage
- Novated lease
- Cross-border leasing
- Personal Contract Purchase
References
External links
- BVRLA (British Vehicle Renting and Leasing Association)
- FLA (The Finance and Leasing Association)