Leasing is a popular option many people chose when looking to get into a new car. Leasing offers low monthly payments and offer the chance to upgrade your car every few years. How does leasing work? What factors determine the monthly payments? What happens at the end of a lease? Keep reading to learn more about car leasing.

How Does Leasing Work?

The major difference between leasing and financing is you don’t own the leased car. The leasing company retains ownership of the vehicle and you agree to make monthly payments to the leasing company in exchange for use of the vehicle. Your payments are designed to cover the wear-and-tear resulting from your use of the vehicle.

What factors determine the monthly payments?

A number of factors help determine the monthly lease payment. These factors include; the cost of the new vehicle, the value of the car at lease-end (residual value), any down-payment or trade-in, and the lease interest rate.

The residual value of a car is calculated based on the lease term (length of lease), annual mileage limit, and anticipated demand for the car at lease end. Longer lease terms, lower mileage limits and higher-demand vehicles generally result in lower lease payments.

What happens at the end of a lease?

Towards the end of your lease terms, the lease company will conduct an inspection of the vehicle. The inspection will look at the vehicle condition, including excessive wear-and-tear, collision damage and after-market modifications. You will be responsible for any damages or modifications and are expected to return the car in a suitable condition. If the mileage exceeds the lease limit, you will incur extra charges. After repairing damages and paying any extra mileage charges, you are free to return the vehicle with no other obligations at the end of the lease.

An alternative to returning the vehicle is to buy it at the end of the lease. If you wish to buy the vehicle, the end-of-lease purchase price is the residual value contained in the original lease agreement. One point worth noting is if you buy the car at the end of the lease, you don’t have to repair damages or pay excess mileage penalties. If you’re happy with the car, the purchase option can make the most sense, especially if the residual value is below market value for a similar car.

Leasing is a cost effective way to put yourself into a new car. If you value driving the latest model cars and want to avoid the hassles of selling your used cars, then leasing is your best option. You can fill out a finance application here and learn more about the differences between leasing and financing.