What is Car Leasing?

Leasing is nothing more than a method of paying for the use of a car, truck, SUV, or van over a specified period of time. Sounds like renting, but don't get the two confused because they are very different. Where you can rent a car for as little as a day, or even a few hours, leasing typically starts at 24 months.

Price is important in Car leasing

When you lease a car, you negotiate a purchase price with the dealer just as you would if you were buying. This key point is not well known and dealers have even told customers that, because it's a lease, price is always full sticker price. This is simply not true. Generally, the only time you would not need to negotiate price is when the dealer is offering a special advertised deal in which the price and other factors of the lease are already set to attract your business.

Once you and the car dealer agree on a price, and you've signed the lease contract, the dealer actually sells the car to the leasing company at that price. The leasing company then leases the car to you, based on that price. For this reason, price becomes the most important factor in what you'll pay in monthly payments.

The Car dealer is not the leasing company

The car dealer simply acts as an agent for the leasing company so that you don't deal directly with the leasing company until you start to make monthly payments. The dealer works out the terms of the leasing agreement with you on behalf of the leasing company. For this service, the leasing company usually pays him a commission, which adds to his profit on the deal. Once the contract is signed, your relationship is with the leasing company, not the dealer, unless it's an issue with the vehicle itself.

Leasing companies used by dealers are usually subsidiaries of the car manufacturer (called  "captive" leasing companies), such as Ford Motor Credit or General Motors Acceptance Corporation (GMAC).  However, dealers can also offer leases from banks and other lending institutions with whom they've worked out mutually beneficial business terms.

So, automobile dealers are in the business of providing automobiles; leasing companies, banks, and credit unions provide leases.

You can find your own car leasing company

As a leasing consumer, you have the option to shop for your own leasing company, bank, or credit union to find better lease terms than the dealer's leasing companies can offer you. These independents can often arrange to get you an even better price due to fleet purchasing arrangements. The tradeoff is that dealers make it very convenient to arrange for both the vehicle and the lease all in a single meeting, and the dealer's captive leasing company can often offer special lease terms to help the dealer move vehicles.

In Canada, independent leasing companies are harder to find than in the U.S., meaning you're more likely to be stuck with the car manufacturer's finance company. This has helped contribute to higher lease costs in Canada.

What it means to lease a car

Signing a leasing contract means that you agree to make regular monthly payments, keep appropriate insurance, pay any vehicle taxes and licensing fees, and take good care of the vehicle. Further, you agree that you'll keep the car for a specified number of months — typically 24, 36, or 48 months — and you're expected to stick it out to the end.

At the end of your car lease

At the end of the lease you're expected to return your vehicle to the leasing company with no more than normal wear and tear. You'll have to pay for any damage or extra mileage over and above your contract-specified limits.

You may have an option to purchase your vehicle at lease-end for a specified price, if you choose. Or you may be able to use the car as a trade-in on a new car. Otherwise, you can simply return the vehicle to the leasing company and walk away. Be careful, however, because you might just have equity value in your vehicle that you don't want to simply give back to the leasing company.

Making the best decision about what you do with your vehicle at lease-end — returning it to the leasing company, buying it, trading it, or extending your lease — requires that you look at each option carefully and evaluate the tradeoffs.

Canadians should particularly make sure that the lease contract specifies a lease-end purchase option, if you think you'll want it. It's not automatically in the contract.