Understanding Leasing As One of Your Options in Car Financing

When buying a car, one faces an option which is eitherthen the lessee will approximately pay $12 000 for
to purchase the car (with own money or through a carleasing the car.
loan) or to lease it. Understanding the nature andLessors use three primary techniques for obtaining
implications of the two car finance option can makeassets to be leased. The method depends largely on
you arrive to the best option which fits for you andthe desires of the lessee. One is a direct lease result
your pocket.when the lessee did not previously own the assets
Lawrence Gitman defined leasing as an option thatthat is leasing and he only acquired it from the lessor.
enables one to obtain the use of certain fixed assetsThe other one is a sale-back arrangement, the lessor
for which it must make a series of contractual, periodic,acquire leased asset by purchasing assets already
tax-deductible payments. The lessee is the receiver ofowned by the lessee and leasing them back. The
the service of the assets under the lease contractlessee receives cash for the asset immediately by
while the lessor is the owner of the assets.selling an existing asset to a lessor and the leasing it
There are two basic types of lease: the operatingback, while obligating itself to make fixed periodic
lease and financial lease. Operating lease is normally apayments for the use of the leased asset. Leasing
contractual arrangement and is a commonarrangement that include one or more third-party
arrangement for obtaining short-lived assets such aslenders are called leverage lease. The lessor here acts
automobiles. So we will be discussing more ofas an equity participant supplying only about 20% of
operating lease as a car finance option. This is a carthe cost of the asset, and a lender supplies the
finance option whereby the lessee agrees to makebalance. This kind of arrangement is popular in
periodic payments to the lessor, often for 5 or fewerstructuring leases of very expensive assets.
years, to obtain an asset's services. Such leases areA lease arrangement typically specifies whether the
generally cancellable at the option of the lessee, but helessee is responsible for maintenance of the leased
or she may be required to pay a penalty forassets. Leasing the car normally requires the lessor to
cancellation. Assets that are leased under operatingshoulder maintenance expense, insurance, and tax
lease have a usable life than is longer than the term ofpayments.
the lease. Let us say, if the car has a usable life of 5The lessee is usually given a renewal option to renew
years, then the lease agreement for its car finance willa lease at its expiration or to purchase it. This option
usually end after 3 or 4 years.grant lessees the right to re-lease assets at expiration
If an operating lease is held to maturity, the lessee atand are common in operating leases such in leasing a
that time returns the leased asset to the lessor. Thecar, because their term is generally shorter than the
lessor then will either lease it again or sell the asset.leased asset at maturity. Purchase options on the
Normally, at the termination of the lessor, the asset stillother hand, allow the lessee to purchase the leased
has a positive market value. In some instances, theasset at maturity, typically for a predetermined price.
lease contract gives the lessee the opportunity toUnderstanding lease will help you assess if it is the
purchase the leased asset. Generally, the totalbetter option in buying a new car for you or not.
payments made by the lessee to the lessor, are lessDecisions still depends on you but being knowledgeable
than the lessor's initial cost of the leased asset. Thewith the choices being offered to you, can help you
lessor here will likely to be the manufacturer's leasingchoose the better car finance option that is best for
subsidiary or an independent leasing company. Let usyou.
say, if the manufacturing cost of the car is $15 000,