What is car renting?
Cars can be 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 when requested, based on a daily or weekly fee, and includes either unlimited mileage or an additional mileage rate.
Car renting is not a form of financing, as is leasing. Car renting is much the same as apartment renting or leasing.
What is leasing?
Leasing is actually a method of vehicle financing that is very similar to loan financing. A lease 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.” 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).