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How Does A Lease Work?

May 16, 2016

Leasing a great option for many, many drivers, but not everyone takes advantage of this affordable driving solution. When you lease a car, you are paying to borrow a car for a set amount of time and a given number of miles. Instead of paying for the whole car, you are only paying for the portion that you use (depreciation) and the money rate factor (rent charge). At the end of the lease, you have several options: 1 ) you can drop the keys off and walk away 2) you can buy the car for yourself 3) you can sell the car 4) you can use the car like a trade-in towards another purchase or lease and 5) sometimes, you can extend you lease for another few months.

Your monthly lease payment is the sum of the monthly depreciation payment and the rent charge. Depreciation is just the difference between the selling price of the vehicle and the residual value (which you know at the time of the lease), divided by the number of months. So, if the selling price of a hypothetical vehicle is $20,000 and the residual value is $16,400, then the monthly depreciation payment on a 36-month lease is $100. The monthly rent charge would be calculated by adding the residual to the selling price and multiplying that sum by the money rate factor. For example, using a money rate factor of 0.00140, the monthly rent charge would be ($20,000 + $16,400) * 0.00140, which is $50.96. In this example, the total monthly lease payment would be $150.96 every month for 36 months. For the sake of comparison, a 60-month loan at 3% APR on that very same hypothetical car is $359.37 per month

People often say that they do not want to lease because they would prefer to own a car. The fact of the matter is that you do not own a car until you make the final payment. In the above example, it is the bank’s car for the first 60 months before you own the car, but you are still responsible for replacing the tires, brakes, etc. as needed. In short, you do not own the car, but you own all the headaches that come with it. In contrast, when you lease a car, you own five great options and never have to worry about being “underwater” when your loan is more than your car is worth. When you lease a new car, you have a new car warranty, and when you lease a Toyota Certified Pre-Owned vehicle, you get one of the strongest certified warranty programs around.