Howstuffworks.com's "How Vehicle Leasing Works"

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How Vehicle Leasing Works
by Melissa Russell-Ausley

Leasing is a very popular trend in the auto industry today. You'll find ads for leasing vehicles everywhere -- in newspapers, radio and TV commercials, and if you go to a dealership, they'll probably suggest leasing!

There's a lot you should know if you are considering leasing a vehicle. So, in this edition of How Stuff Works, we will define a lease, its players, its terms, and the types of leases. We will also compare leasing and buying, and cover the different aspects of leasing, including price negotiations and sales tactics, terms you need to know, and your options at the beginning and end of a lease. You'll be amazed at how much more sense leasing makes once you understand the details!

What is a Lease?
If you've bought a car, you know how buying a car works:

You find a car you like

You negotiate the price with the sales agent

You secure financing through a bank or the dealership

You buy the car

You drive the car for x years

You sell the car to another buyer

You take the profit and buy another car

If you think about it, this process is a little cumbersome for two reasons:

You have to deal with three different people -- the dealer, the bank, and the person who buys your used vehicle
You have to make monthly payments for 48-60 months on the entire value of the car, and then you get a lump sum back all in one chunk when you sell it

The key advantage with a vehicle lease is that you assume the re-sale profit up front and subtract it from the price of the car. That assumption lowers your monthly payments dramatically. This is the option that is so appealing to so many car shoppers. Leasing began as a way for dealers and sales agents to attract buyers who had been scared away by ever-climbing vehicle prices, loan amounts, and monthly payments.

A vehicle lease is a legal agreement between two parties that specifies the terms and conditions for the use of the property. A vehicle lease agreement is not between you and the car dealer, but between you and a finance company that the dealer uses, as illustrated in the figure below. The dealer sells the car to the finance company, who leases the car to you (at a higher rate than what they bought it for, of course). The dealer's role is to negotiate the lease terms and details for the finance company when you acquire the vehicle.

Three key terms that creep up in this three-way sell-buy transaction are cap cost, cap cost reduction, and acquisition fee.

Capitalized Cost: "cap cost," how much the dealer sells the car to the finance company for (minus your cap cost reduction payment). If you were buying this vehicle, this would be referred to as the sales price.
Capitalized Cost Reduction Payment: "cap cost reduction," a down payment, factory-to-dealer incentives, rebates, or trade-in (negotiable).
Acquisition Fee: an administration fee charged by the leasing company when you acquire the vehicle. If you don't see this fee mentioned in the leasing contract, ask about it because it may be included in your cap cost and would then affect your monthly payment.

We will discuss these terms repeatedly throughout this article.

Go to the next article about How Vehicle Leasing Works or pick from the table of contents:

Introduction to How Vehicle Leasing Works, What is a Lease? You are here
History of Leasing
Lease Terms and Types of Leases
Why Lease? The Pros
Why Lease? The Cons
Leasing vs. Buying
End-of-Lease Options
What to Expect at the Dealership
To Lease or Not to Lease...
Links
Terms Defined

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