Leasing a car: What it means to lease instead of buy

Leasing a car is very much like renting a car from a car rental company or renting an apartment from a landlord. With a vehicle lease, you agree to make a “rental” payment each month for the use of the leased vehicle. You, as the lessee, are the one who receives and uses the vehicle but you do not “own” it. The owner of the vehicle is either the financial institution that financed the lease or the auto dealership that financed the lease through their in-house program.

The lease payment: Lease payments consist of two separate charges: a “depreciation charge” and a “finance charge”. Depreciation charges effectively compensate the organization leasing you the vehicle for the amount of the vehicle’s value that is lost during the term of your lease. Finance charges are the interest costs for the money the leasing organization has tied up in the car during the period of your lease. Think of it as you are borrowing the money that the leasing organization used to purchase the vehicle from the dealership where you set up the lease. Over the term of the lease, you repay some of that money with each monthly payment you make, and then repay the remaining amount when you either return the vehicle or purchase it at the end of the lease term.

The loan payment: Loan payments also consist of two separate charges. The first is a “principal charge” and the second is a “finance charge”. When you buy a car and finance it, the lending institution issues money directly to either you or to the car dealership and you agree to repay that money with any associated interest charges over the period of the loan. The “principal charge” pays off the full vehicle purchase price of the term of the loan. The “finance charge” is the loan interest on the unpaid monthly balance. Note that you technically do not “own” the vehicle you have financed until the loan has been repaid in full to the lender.

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