When you lease a vehicle, you (the lessee
) contract with the owner (the lessor
) to make payments in exchange for driving and operating the leased vehicle during a lease term
. As lessee, you pay for fuel, insurance and other operating expenses but not repairs. You also pay taxes and registration fees.
Leasing requires you to make a down payment on the leased vehicle, which the industry calls a capitalized cost reduction
. (Your down payment reduces the amount that is capitalized as a lease.)
You will have to pay a security deposit -- sometimes called a reconditioning reserve
-- that is usually refunded at the end of the lease term unless you violate terms of the lease agreement. Leasing requires you to make the first monthly payment upfront, at the beginning of the lease term.
One reason for leasing is that the monthly lease payments are usually smaller than loan payments. If you decide to lease a vehicle instead of borrowing or paying with cash, you should be familiar with the two main types of auto leases.
A closed-end lease
doesn't require additional payments at the end of the lease term unless you violate the lease agreement or commit excessive wear-and-tear. A closed-end lease protects you more than an open-end lease. It more closely fits the description of a "walk away" lease -- one that you can truly walk away from without additional commitments (unless you violate the lease agreement, of course).
An open-end lease
requires you to make up any difference in the vehicle's fair market value and residual value at the end of the lease term. Depending on the lessor's calculation of the vehicle's fair market value, you could be faced with an extra payment of hundreds of dollars or more. Because of the unpredictability of this payment, you should choose a closed-end lease.
The Consumer Leasing Act requires lessors to explain all leasing terms and charges to you.