There are many reasons to lease, including the potential for lower monthly payments and the ability to drive a new car every few years. Some consumers also like the fact that leasing can streamline writing off a vehicle at tax time.
Learn everything you need to know about leasing, from the basics to how it works with other accounting methods.
What Is a Lease?
A lease is a legal contract in which the owner of a property (such as land or a car) lets someone else use it for an agreed period of time in return for regular payments of money. The word “lease” is derived from the French verb “l’assaut,” which means to take up or occupy temporarily. A lease is a legally binding agreement, so both parties must abide by its terms.
A leasing agreement may contain different sections depending on the type of property being leased and the needs of the parties involved. For example, an auto lease will typically include specific provisions describing how many miles the car can be driven each year and what happens if you exceed that limit. Similarly, a residential lease will usually stipulate the types of activities allowed in the property and the responsibilities of both the lessor and lessee.
There are many reasons why people choose to lease rather than buy property. Leasing provides consistent cash flow to a lessor, while it allows the lessee to acquire property without having to pay a significant amount of money upfront. There are also tax benefits to leasing, as the leasing company often pays or reimburses some or all of the sales and excise taxes incurred by the person who signs the lease.
Leases have been around for centuries, but the specific form of the contract has changed over time with the changing social and economic conditions. Historically, leases were used for agricultural purposes and were based on the premise that the land would be returned to the landlord after a certain period of time. More recently, the concept of leasing has been extended to other types of properties such as houses and cars.
In accounting, a lease is defined as a contractual arrangement calling for the payment of rent in exchange for temporary use of property owned by the lessor. A lease may be recorded as a payable or as an asset on the balance sheet and is subject to accounting and disclosure requirements.
As a result of FASB’s new lease guidance, the topic of leases has received much attention across industries. Checkpoint Learning offers a number of courses and webinars that focus on topics including lease definition, lease classification, balance sheet presentation, transition, lease payment, lessee accounting, implementation considerations and disclosure requirements.
What Are the Benefits of Leasing a Car?
Many people prefer to lease cars because they typically have lower monthly payments than car loans. Some people also like to have the opportunity to drive a new car every few years, ensuring they have the latest technology available. Others prefer to keep a certain amount of cash in reserve, and leasing makes it easier to do this.
It’s important to consider all of the fees associated with leasing a vehicle before making a decision. These may include an acquisition or lease initiation fee, an upfront down payment, a security deposit, and other charges. When comparing the costs of leasing to buying, you should also factor in the value of the vehicle over time, as it is possible to end up spending more in the long run when you lease vehicles.
The other major advantage of leasing is that you can often get a bigger and more expensive car for the same or less money than when you buy a vehicle. You can find more luxury models, larger SUVs, and higher-end trim packages for the same price as you would pay when you buy a similar model. This is especially true if you are willing to make a smaller down payment than you would with a car loan.
There are some negatives to leasing, however. You don’t build equity in the car, and you must return it to the dealer when your lease period ends unless you decide to purchase it. Also, the car’s value can drop significantly during your lease term, which could affect its trade-in or resale value.
You’ll also be subject to a lot of restrictions when you lease a car, such as mileage limits and modification limitations. If you’re a person who loves to customize your vehicle or frequently drives off-road, a lease isn’t the best choice for you. Lastly, if you don’t maintain your vehicle properly, you may face excessive wear-and-tear charges when you turn it in at the end of your lease. These charges can be a huge sum of money, so be prepared for them.
How Do I Lease a Car?
When leasing a car, it’s important to understand the financial and legal terms that are involved. It’s also helpful to determine whether this is the best method for financing your next vehicle. Start by determining how much you can afford to spend each month on your lease, including the cost of insurance, fuel and interest rates. You can use an online calculator to help you with this task. Then, find a vehicle that meets your budgetary requirements.
You should also consider your driving habits and what you plan to do when your lease ends. Edmunds recommends a three-year lease, which gives you the benefits of the manufacturer’s bumper-to-bumper warranty while giving you time to decide if you want to keep the vehicle. However, you can also choose longer-term leases, which typically have lower monthly payments but reduce the resale or trade-in value of the vehicle.
During the leasing process, make sure you negotiate the price of the vehicle as you would when purchasing it. A dealer will likely try to sell the vehicle for as close to the residual value as possible. If you are able to bargain successfully, this may give you a better deal.
Another thing to consider is the mileage restrictions that come with most leases. You’ll likely have to limit your miles, as exceeding these limits can result in costly overage fees. Calculating your annual mileage ahead of time will help you find a lease that is appropriate for your lifestyle.
Once you’ve found a vehicle that fits within your budget and you’re satisfied with the lease terms, it’s time to sign on the dotted line. Before you do, read the contract closely and check that all of the numbers on the worksheet match what is in the final lease contract. You should also confirm that the lease includes gap insurance, which protects you in case your leased car is stolen or totaled in an accident. Finally, make sure to review the documentation that’s provided by the lender after you submit your application. This should include a copy of the lease agreement and all of the associated paperwork.
How Do I Lease a Room in a House?
When renting a room in your home, you are considered the landlord and must abide by landlord-tenant laws. Your lease should include information such as the name of the roommate, the address of your home, a description of the room and any shared spaces (kitchen, bathroom, laundry rooms) and the term of the agreement, along with the monthly rent amount and any required security deposit. You should also set out your house rules in the contract, such as whether overnight visitors are allowed or not and how often you expect the tenant to do his laundry.
You must also make sure to check with your local, state and federal housing and landlord-tenant laws for specific guidelines for leasing a room in your house. For example, you may need to provide a written rental application and screening process, which should also include requests for references and a credit report, and a walkthrough of the property with the applicant. If you choose to charge an application fee, you should make this clear in the listing and on the application form.
Once you have found a suitable applicant, you should draw up a standard lease agreement and a list of house rules and go over both with your roommate to ensure that they are understood. The document should clearly state the address of your home, the room that will be rented, and the terms of the lease agreement, including when rent is due and what type of late fee is charged. You should also clarify what is included in the rent and what is not, such as water, gas, trash and insurance.
You should also specify whether the room will be furnished or unfurnished, and any other details such as what days of the week your new roommate is expected to do his laundry and when he can park in your driveway. You should also agree on a day when you both will do a general walkthrough of the property to ensure that everything is in good working order and that you are both on the same page regarding your expectations for the room.