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A typical vehicle lease is a rental agreement between the lessor (Dealer or Leasing company) and the lessee (Customer) in which the lessee agrees to make a set number of payments in exchange for the use of the vehicle. At no time during the lease term does the lessee own the vehicle. Today most lessors offer "closed end" leases. | back to top | Under a closed end lease, the lessor sets the residual value--an estimate of the vehicle's value at the scheduled lease termination. At termination the lessee may either return the car to the lessor with no further obligation (unless the vehicle shows abnormal wear and tear) or purchase it for the either "residual value" or "fair market value." If the vehicle is returned to the lessor showing excessive wear and tear, the lessee will be responsible for compensating the lessor. | back to top | The lessee's option to purchase at the residual value is a key benefit of leasing. If the vehicle depreciates substantially because of market conditions during the lease term, the lessor suffers the loss not the lessee. But if the vehicle fares better than expected, the lessee can buy the vehicle at a below-market price. This feature is a risk reduction for the customer. | back to top | Compared to a loan with the same term, a lease has lower payments because the lessee is not financing the full price of the car (and in some states, the sales tax). The lessee is obligated only to pay for the difference between the capitalized cost and the residual, plus "interest." The lessee does pay for insuring and maintaining the vehicle, for license and registration fees, just as he or she would be if buying or financing the car with a loan. | back to top | When leasing a vehicle, much like leasing an apartment, the lessee typically pays the first month's rent plus a security deposit at signing--usually about equal to the monthly payment. For vehicles leases, if the lessee wishes to put in more cash or trade a vehicle, the cash down or trade-in's value will reduce the amount financed and the monthly lease payment. | back to top | A vehicle's value depends on its mileage. So when the lessor sets the residual value at the beginning of the lease, he must specify what the vehicle's mileage will be at lease termination. If, at termination, the car has more miles than specified, it's value will be less than the residual value and the lessee will have to compensate the lessor. Standard annual mileage is usually 12,000 or 15,000. If a lessor offers the lessee a higher annual mileage allowance by reducing the residual value of the vehicle by a preset amount, it will result in a higher monthly payment. | back to top | PO Box 4685 - Santa Barbara - CA - 93140
info@vanguardcredit.com – phone 805.962.1506 – fax 323.372.1610 |
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