Types of Vehicle Leases
Question: I’ve heard not all auto leases are the same. How do they differ?
Answer: You’re right. There are several types of auto leases and it’s important to understand the distinctions between them before you sign your lease contract.
Here’s a brief primer on what’s available:
These are the most popular kind of consumer leases. Sometimes called “walk-away” leases, they allow you to return the vehicle at the end of the term with no further financial obligation (unless you choose to purchase the car outright). The lessee is not responsible for any difference between the vehicle’s lease-end or residual value as stated in the lease, and the actual value of the vehicle at the end of the lease. This is good news in the event that the actual value of the vehicle at the end of the term is lower than the residual value specified in the lease. You could, however, still be hit with extra charges if the vehicle is not serviced or cared for as required by the lease or if it has been driven more miles than allowed by the terms of the lease (typically 12,000 to 15,000 miles per year).
Here, the lessee is responsible for paying the difference if the residual value estimated upon the signing of the lease is less than the actual market value at the end of the lease. This is called the “end-of-lease” payment. If the market value is greater than the residual value at scheduled termination, the lessee may get a refund. It’s a risk, but an open-end lease might make sense for an individual who drives a lot, as it has no mileage restrictions. Open-end leases are often used by commercial businesses that tend to have high mileage. The financial risk is less for businesses as the cost can be expensed.
In these kinds of leases, the lessee makes a single lump-sum payment right off the bat, rather than periodic payments over the term of the lease. The concept behind single-payment leases is that the lessee can save money by paying in advance and avoiding interest charges. But wily dealers may try to deprive unwitting customers of this benefit by charging interest on the entire lease period in the initial payment. The only way to ensure you are not being overcharged is to calculate the single-payment charge yourself.
Also called “subvented leases,” these might be the best deals in the leasing world. Here, in an effort to move more vehicles off the lot, manufacturers either offer extremely low interest rates, or set a higher residual value on a car than is forecast, thus shrinking the depreciation-payments component of the lease. The manufacturer’s loss (the artificially high residual) is the customer’s gain, so a subvented lease can be a good bargain.