How auto leasing works

An lease is simply an agreement between two people/companies/parties, that specify the terms and conditions for the rental of a vehicle. For auto leases, this agreement is not between the individual and the car dealership, but between the individual (or company) and the leasing company. The leasing company is selected by the dealership.The vehicle being leased, is actually sold to the leasing company as selected by the dealer. The dealer, then in turn rents (or leases) the car to the individual. So basically, the dealer only acts as an agent or representative for the leasing company and negotiates the terms and conditions on behalf of the leasing company, which under those terms and conditions the consumer will rent the car from the leasing company.

This is a high-level idea of how auto leasing works. There are other finer details in understanding how leasing works for a vehicle, however the above gives a good general concept of how leasing works.

Another way of understanding how leasing works is viewing the lease agreement on the concept you pay for the amount by which a vehicle’s value depreciates during the time you’ve agreed to hold the vehicle – 3, 4, 5 years. The depreciation is the difference between a vehicle’s original value and its value at lease-end (residual value), and the primary factor that determines the cost of leasing.

Many difference vehicle makes and models can vary tremendously of depreciation rates. Vehicles having the lowest depreciation make the best lease deals. And generally, European and Japanese vehicle leases tend to have a lessor depreciation value than American brands. Foreign brands as Toyota, Honda, and Volkswagen have typically held low depreciation rates, as has luxury vehicle brands as Mercedes, BMW, Lexus, and others.

But as you’re in our leasing school 101 class right now, all you need to know is the general idea of how leasing works. We’ll get into much further details of the specifics later in our 301 and 401 sections.

Next: What is a short term lease?

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