Used Car Leasing

Twenty years ago, leasing a car made sense for individuals that were writing-off their monthly lease payments as part of a business expense. Today, many people prefer the luxury of driving a new car every two or three years. The shift from buying to leasing cars has led to a large, and growing, used car leasing marketplace.

In fact, because of the relatively short duration of car leases, many of these used cars are now labeled as certified pre-owned vehicles that are "gently used." This means many high-quality used cars can be found on the market at bargain prices.

Leasing a Used Car

Additional Resources

We're going to start this article with a quick discussion of car leases, including some of the more common terms and conditions typically included in a lease contract. We'll also discuss how to determine the value of a used car, insuring a leased car, as well as how to find a safe and reliable used car to lease.

The leasing terms and conditions found in today's contracts are one of the main drivers for the large number of high-quality used cars on the market. The very nature of a lease agreement helps to explain what happens. When you lease a car, you're never really considered the owner of the vehicle. The lease itself is just a written agreement for use of the car over a specific period of time.

Because of that agreement, someone leasing a car is fully responsible for taking good care of the vehicle during the course of the lease. If the car shows excessive wear and tear, or is damaged, the person leasing the car is usually responsible for paying for repairs. That's enough financial incentive for most lessees to take special care of the car, and this agreement provides a big benefit to the used car market.

Used Car Leases

Whether it's a new or used car that you're leasing, you should expect to encounter the same types of leasing contracts when it comes to the terms and conditions of the lease. Three of the more important details include upfront payments, mileage quotas, and lease termination conditions.

Upfront Lease Payments

Typically, there are significant upfront costs when leasing a car. This money is used to pay for various types of lease origination fees as well as to lower the month lease payments themselves. For example, the capitalized cost reduction payment on a car lease is like a down payment when you are purchasing a car. Without this upfront payment, the monthly lease fee, or premium, would be much higher.

Mileage Caps

Nearly all leases limit the number of miles that an automobile can be driven without incurring an excess mileage charge. The range of allowed mileage will usually vary between 5,000 and 15,000 miles per year. Excess mileage charges can add significantly to the cost of leasing a car.

For example, if you drive a car 5,000 miles more per year than allowed under the lease's mileage cap, and the excess mileage charge is $0.25 per mile, then you've effectively added about $100 per month to your lease costs. If you drive a lot of miles each day to work, then leasing the car may not be a good option.

Early Lease Termination

There are several ways to terminate or end a lease, even on a used car. All three options can cost you money, and sometimes even damage your credit rating. You should never enter into a car lease thinking that terminating the lease will be easy or painless.

Terminating a Lease

Early termination of the lease is simply returning the car to the lessor, or dealership, before the lease end date. In many situations, you will still be responsible for the remaining lease payments and / or early termination fees. This is an expensive option that can cost you thousands of dollars.

Repossession

Alternatively, you can stop making your monthly lease payment, and allow the lessor to repossess the car. This option might allow you to avoid payment of termination fees, but just like any non-payment of monies, it can severely affect your credit score, making future borrowing more difficult.

Lease Assumption or Swaps

This final method of terminating a lease actually results in a rather robust used car leasing market. By finding another party to assume your monthly lease payments, you can walk away from the lease without any significant termination fees.

On the other hand, a lease swap can also be a great way to find a used car to lease. By taking over the payments on the car, you can avoid all of the upfront payments, such as the capitalized cost reduction fee, and benefit from the lower monthly payments.

Used Car Lease Values

If you decide to lease a used car, it is admittedly more difficult to determine whether or not you are getting a good value or deal. That's because there are more variables to consider when leasing a used car such as the existing mileage, and the vehicle's overall mechanical condition.

One of the primary factors influencing the size of a lease payment has to do with the residual value of the car. Unlike new cars, which have a sticker price to refer to, the retail value, or true market price, of a used car can be somewhat subjective.

Another lease consideration is whether or not the car is still covered under the manufacturer's warranty. If not, you may want to purchase extended warranty coverage to protect the car over the term of the lease. For more information on this topic, you might want to look at our article on Used Car Warranties.

Researching Used Cars

Whether it's a new or used car, you also need to do some research. You need to make sure the car meets your functional needs, as well as provides you with a reliable source of transportation. We've covered this topic in some of our previous publications:

Dependable Used Cars - based on information gathered through J.D. Power surveys, this article talks about the makes and models of cars that are considered mechanically dependable.
Used Car Values - if you're trying to figure out how much a used car is worth, this article explains how you can find reliable used cars as well as the price you should expect to pay for those cars.
Financing Used Cars - this article gives you a run down on the financing options you have when purchasing a used car.
Car Safety Ratings - finally, this article provides information on how to find cars with superior safety features and crash-test ratings.

Insuring a Leased Car

One final consideration before entering into any lease agreement is the amount of car insurance you should carry on a leased vehicle. If your leased car is somehow damaged to the point where the insurance company considers the car totaled, then a gap can exist between the insurance company's payment to you and the value of the car.

For example, let's say that the value of the leased car, as determined by your insurance company, is $8,000. Let's also assume the value remaining on the lease is $10,000. When this disparity occurs, you will be responsible for paying the remaining $2,000 on the lease, the gap in the two values, if the car, truck, or SUV were totaled in an accident.

Many new vehicles come with gap insurance, which is used to cover the gap between the value placed on the car by the insurance company and that of the lease. Gap insurance coverage is less common with used cars. That's why it's important that you understand what happens if the car is involved in an accident.

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Leasing / Buying a Car