The Basics of Car Leasing

Car leasing is a popular alternative to buying a car outright, particularly in Switzerland where approximately 75% of new cars are acquired through leasing agreements. This method offers flexibility and lower upfront costs, making it an attractive option for many drivers who prefer to drive newer models more frequently without the financial burden of full ownership.

Difference Between Buying and Leasing

Unlike buying a car, leasing is akin to renting the vehicle for a long-term period. When you lease, you do not own the car; instead, you pay to use it for a set term defined in the lease contract. This fundamental difference influences many aspects of the financial and legal commitments involved.

How Leasing Works

A car lease is a tripartite agreement involving you (the lessee), a financial institution (typically a bank), and a car dealership. The process starts with your credit score evaluation, as it influences the leasing terms and approval. Failing to make timely lease payments can negatively impact your credit score, much like any other defaulted financial obligation. Here is what happens when you get a leasing:

• You (the Lessee): As the lessee, you agree to rent the vehicle for a set period while adhering to specific terms and conditions stated in the lease agreement.

• Financial Institution (the Lessor): Typically a bank or a leasing company, this party legally owns the vehicle. They purchase the car from the dealership and lease it to you.

• Car Dealership: Acts as the intermediary that sells the car to the lessor and facilitates the lease agreement with you. At the end of the contract, the Car Dealership buys back the car from the Financial Institution, at an agreed price (residual value)

Basic Financial Elements of Leasing

As always, it all starts with the agreed car price. Instead of paying the full amount as in a normal sale, in a Leasing agreement you pay several elements that, together, add up to the total car price:

• Downpayment: An initial payment is required at the start of the lease, which typically reduces monthly payments but does not contribute toward equity in the car.

• Monthly Rates: Calculated based on the difference between the car’s initial value and its residual value, adjusted for interest rates and lease duration.

• Residual Value (Buy-back price): The projected value of the car at the end of the lease term, which affects monthly payments and buyback options. Note that this is a projection in the future on which the dealership and the leasee agree but there is no guarantee that the car's worth will reflect this value at the end of the leasing period.

Major Dangers of Leasing

• Disguised High Purchase Prices: Sometimes dealers set higher car prices in leasing than buying outright.

• High Buyback Prices: Setting a buyback price significantly higher than the market value can make terminating the lease costly.

• Cost Per Kilometer: Charges can be steep if you exceed the mileage limit specified in your lease, typically around 0.7 CHF per kilometer. This can add up very quickly when you exceed your quota by 10'000 or 20'000 Km over the leasing period.

• Overspending: Leasing can sometimes lead to choosing a car that is beyond what one would normally afford.

About “0% Interest Rates” Leasings

• Offers advertising “0% interest rates” are often misleading, as the discount might be embedded in an inflated down payment or residual value. Moreover, these terms are typically not transferable, complicating any potential sale of the leased vehicle before the end of the term.

Our expert advice when considering leasing:

• Evaluate the total cost, not just the monthly payments. If the purchase seems unaffordable outright, leasing might not be a wise alternative.

• Always read the fine print of the leasing contract to understand all terms and conditions fully.

Canceling a Lease

There are several reasons you might need to cancel your lease, such as exceeding the mileage limit, needing to relocate, or finding the payments unmanageable. Different leases offer various termination options, and it’s crucial to understand these before signing the contract.

At SellYourCars, we offer assistance for selling your car even under a leasing agreement. For more information, check out our article on "How to Sell a Car with a Leasing."