Thursday, July 28, 2011

❏This vs That ❐: Rent vs Lease

Welcome to Thursday's

Rent is defined as:
  1. a payment made periodically by a tenant to a landlord in return for the use of land, a building, an apartment, an office, or other property.
  2. a payment or series of payments made by a lessee (user) to an owner in return for the use of machinery, equipment, etc.
Lease is defined as:
  1. a contract calling for the lessee (user) to pay the lessor (owner) for use of an asset.
So right off the top you can see one major difference between renting and leasing is the contract.

Rent and Lease are terms used mostly in regards to real estate or auto. The two differ in terms of the time period, payment and type of contract.

Rent vs Lease - HOME

In terms of residency, standard rental agreements are usually month-to-month, and there is no set period of residence. Both the landlord and tenant are free at the end of each 30-day period to make changes to the rental agreement, subject to any rent control laws.
A lease has a finite term, which is often a long period of time, generally in years. During this time period, also known as the duration of the lease, the tenant and the landlord are bound to uphold the terms of the written agreement.

A lease may not automatically be renewed after the expiry of the time period, unless specified in the agreement. Rental agreement, on the other hand is automatically renewed every month unless either parties give notice to vacate the place.

Summary of Residential Renting vs Residential Leasing
  1. Renting is flexible, leasing is not.
  2. Renting is usually short-term, leasing is long-term.
  3. Renting agreements are usually oral/written, leasing agreements are always written.
  4. Rental agreements are automatically renewed every month unless either parties give notice to vacate the place, a lease agreement, on the other hand, may not automatically be renewed after the expiry of the time period, unless specified in the agreement.

Rent vs Lease - AUTO

Car rental companies exist to fulfill the short-term automobile use needs of traveling business people, vacationers, or those who might need a particular type of vehicle for temporary use.

Rental cars are owned by a rental company and are made available to customers for relatively short-term use. The company maintains and services its vehicles and carries basic insurance. Customers agree to not damage the vehicle, to buy gas, to purchase additional insurance if personal auto insurance is not applicable, and to return the vehicle within a specified time. All maintenance is handled by the rental company.

Rent rates are determined by the car rental company, based on a daily or weekly fee, and includes either unlimited mileage or an additional mileage rate. The method by which rates are determined is not revealed to customers and can vary widely, even within the same rental company, based on various discount schemes.

Rental companies make money by renting the same car over and over again.

Car renting is not a form of financing, as is leasing.

Car renting is much the same as apartment renting or leasing.

On the other hand, leasing a vehicle is very similar to loan financing. A lease company — or manufacturer's finance company – only gets involved after a customer decides he wants lease financing. The lease company buys the car from the dealer at the customer-negotiated price and loans it back to the customer.

The "loan" in this case is not money, but a vehicle. Since the lease company has invested money in the vehicle, they expect to be paid interest on that money. Since all cars depreciate in value, they also want to be compensated for the reduced value of the vehicle as the customer adds miles to it and as the vehicle becomes older. It will not be worth as much when it's returned to them as when it was new.

At lease-end, vehicles are returned to the lease company as the final payment of the "loan." Lease payments are easy to calculate using a well-defined formula used throughout the leasing industry, unlike car renting for which there is no way for customers to calculate rental rates.

In short, lease payments are determined by the negotiated selling price of the vehicle, anticipated depreciated value at lease-end (residual value), term (length of lease), and the money factor (financing rate, similar to interest rate).

A leased vehicle is usually only leased once, when it's new, not over and over again like a rental car.

Summary of Car Renting vs Car Leasing
  1. Leasing is a form of 'loan' financing; renting is not.
  2. Leasing is usually long-term dealing in years, renting is always short-term and can be for as little as a day or less.
  3. You may be able to swap cars in the middle of a rental; not so with leasing. Since leasing is a form of financing, customer credit scores, income, and debt are important; not so with renting.
  4. Leasing appears on your credit report just like a loan; renting does not. Defaulting on a lease damages your credit score; defaulting on a rental does not.
  5. With renting, you choose your vehicle from rental companies' available makes and models. With leasing, you can lease any new vehicle make and model you want.
  6. With renting a vehicle, you can simply return it when you want to.  On the other hand, returning a vehicle before the end of a lease can be very costly, since it's a long-term contract.
For the same length of time, renting a vehicle would be much more expensive than leasing a vehicleWhen you've leased a vehicle you've paid 30%-60% less than loan payments for the same car, and you have specifically paid for your car's depreciation, and only the depreciation, not the entire vehicle cost.

The money you've lost to depreciation is exactly the same money that is lost by someone who has purchased the same car with a loan. His car depreciates exactly the same amount as your leased car, but he pays for the entire vehicle. He therefore has nothing to show for that part of the money that is lost to depreciation if he sells or trades. That money is gone, for both a buyer and a leaser.

Overall, renting or leasing both have their advantages and disadvantages and all depends on your needs.
  • Renting is more flexible than leasing and requires no long-term contract.   A lease — usually written for one year or more, although it can be shorter — is a binding legal contract between two parties.  However, when you sign a lease contract for say, a year,  the monthly payment cannot be increased at anytime throughout the lease period, whereas with renting - the landlord can increase the monthly rental payment  at anytime he feels the need to if improvements were made to the building.  
  • Renting a car is only good if it is needed for a short term, otherwise leasing it would be much better financially in the end.


1 comment:

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