Leasing a car is a method of financing where someone ______.
a. Never pays any interest or fees b. Is paying off two or more vehicles at one time c. Makes monthly payments on but does not own the vehicle d. Does not have to pay any taxes on the vehicle for the first six months
The Correct Answer and Explanation is :
The correct answer is:
c. Makes monthly payments on but does not own the vehicle
Explanation
Leasing a car is essentially a way to finance the use of a vehicle without purchasing it outright. When a person leases a car, they make monthly payments over the term of the lease (typically two to four years) but do not own the vehicle. This financing method differs from buying a car with an auto loan, where the individual gradually gains ownership as they pay off the principal amount and interest. In leasing, the vehicle’s ownership remains with the leasing company or dealership throughout the lease period.
The monthly payments in a lease are usually lower than those for an auto loan because they cover only the depreciation of the car during the lease term, along with taxes, fees, and sometimes interest. At the end of the lease, the individual typically has the option to return the car, extend the lease, or sometimes buy the vehicle at its residual value, a predetermined price reflecting the car’s estimated worth at lease end.
There are some additional fees involved in leasing. These include acquisition fees at the beginning, disposition fees at the end, and possible charges for excess mileage or wear and tear. Lessees must adhere to mileage limits (often 10,000 to 15,000 miles per year), and exceeding these limits can result in costly fees. Additionally, any damages or excessive wear can lead to charges when returning the vehicle.
Leasing offers advantages such as driving a new vehicle every few years with potentially lower monthly costs and access to the latest technology. However, it may not be cost-effective long-term if someone plans to keep a vehicle for many years, as leasing does not build equity in the car.