Vehicle leasing

Vehicle leasing is the leasing (or the use) of a motor vehicle for a fixed period of time at an agreed amount of money for the lease. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a method of acquiring (or having the use of) vehicles for business, without the usually needed cash outlay. The key difference in a lease is that after the primary term (usually 2, 3 or 4 years) the vehicle has to either be returned to the leasing company or purchased for the residual value.

Rationale

Vehicle leasing offers advantages to both buyers and sellers. For the buyer, lease payments will usually be lower than payments on a car loan would be. Any sales tax is due only on each monthly payment, rather than immediately on the entire purchase price as in the case of a loan. Some consumers may prefer leasing as it allows them to simply return a car and select a new model when the lease expires, allowing a consumer to drive a new vehicle every few years without the responsibility of selling the old vehicle, or possible repair costs after expiry of the manufacturer's warranty. A lessee does not have to worry about the future value of the vehicle, while a vehicle owner does. For a business lessor there are tax advantages to be considered.

For the seller, leasing generates income from a vehicle the seller (or manufacturing corporation) still owns and will be able to lease again or sell through vehicle remarketing once the original (or primary) lease has expired. As consumers will typically use a leased vehicle for a shorter period of time than one they buy outright, leasing may generate repeat customers more quickly, which may fit into various aspects of a dealer's business model.

Market penetration

Leasing's average retail market penetration rate in the United States for new passenger vehicles reached an all-time record high of 26.5% in February 2014.[1] This represents a recovery from a severe drop during the financial crisis of 2007–08. As of 2016, leasing accounted for about 25 percent of total vehicle sales or 31 percent retail sales in the United States.[2]

The prevalence of leasing in the United States for GM, Ford and Chrysler have been rising close to the industry norm since reaching low single digits in 2009, but still lower than BMW and Mercedes-Benz.[3]

Lease agreement

Lease agreements typically stipulate an early termination fee and limit the number of miles a lessee can drive (for passenger cars, a common number is 10,000 miles per annum though the amount can be stipulated by the customer and can be 12,000 to 15,000 miles per year). If the mileage allowance is exceeded, fees may apply. Dealers will typically allow a lessee to negotiate a higher mileage allowance, for a higher lease payment. Lease agreements usually specify how much wear on the vehicle is allowable, and the lessee may face a fee if that amount of wear has been exceeded.[4] A lease with maintenance (commonly known in the UK as Contract Hire) can include all vehicle running costs excluding fuel and insurance.

The actual lease payments are calculated in a very similar way to loan payments, but instead of an APR, the company uses something called the money factor.

At the end of a lease's term, the lessee must either return the vehicle to or buy it from the owner. The end of lease price is usually agreed upon when the lease is signed.[4]

Typically a leasing company will have a minimum length of lease such as 24 months up-to 60 months. Recently a new view on leasing is that the market has grown for short term lease called 'flexi-lease'. Flexi-lease is when a person can lease a new vehicle for 3 months and then choose to hand the car/van back or indeed extend the lease for another period. This is almost the same as van hire but typically involves the finance or leasing company maintaining and being ultimately responsible for the vehicle.

UK Vehicle Leasing

Similarly to the US automotive market, leasing a vehicle enables you to have access to a vehicle that you might otherwise be unable to afford if you were to finance the full value. Compared to a PCP method of finance, leasing is far more benefical if you plan on changing your vehicle at the end of the initial contract, rather than taking ownership.

Market Overview

In the UK the leasing market has historically been dominated by businesses and fleet customers. In recent years however the market has shifted and now personal contracts have the biggest market share. This is largely influenced by increasing company car tax for drivers (BIK) and taxable allowances for businesses being affected by vehicle emissions. For company car users who opt out, a personal lease contract allows them to have a fixed monthly payment that's subsidised by their employer, but also allows for a more flexible choice of vehicles than a rigid company car policy.

See also

References

  1. ↑ "J.D. Power Reports: Auto Buyers Are Committing To Leasing And Long-Term Loans At Record Levels". J.D. Power, McGraw Hill Financial. 2014-02-06. Retrieved 2015-02-20.
  2. ↑ Popely, Rick (30 Mar 2017). "Glut of off-lease cars makes it good time to buy used". The Detroit News. Retrieved 24 April 2017.
  3. ↑ "2014 Used Car MarketReport" (PDF). Manheim Consulting. p. 24. Retrieved 2015-02-20.
  4. 1 2 "FRB: Leasing Guide". Retrieved 2007-06-19.
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