In the past deciding how to finance your dream vehicle was pretty easy - you could take out an auto loan or you could take whatever finance package your dealer offered. It's different now. There are lots of ways in which you can finance your purchase. One of the most popular is to take out an auto lease deal.

Auto leases are very like vehicle rental agreements. The biggest difference is the contract lasts much longer.

With lease agreements you never actually own the vehicle. The whole concept is that you are renting the use of the vehicle for the duration of the lease contract.

Lease contracts are set up so that the lease company can extract the maximum value at the end of the contract. They own the vehicle so they can sell it at the end. The cost to them is effectively the difference between the original purchase price and the eventual selling price.

So, suppose you find a vehicle for $20,000 purchase price. The lease company does some sums and tells you that if you take out a 3 year contract with a 12,000 mile per annum mileage limit they will guarantee a residual value of $8,000. The net cost to the auto leasing company is $12,000 plus administration charges (setting up the contract and selling the vehicle at the end) and finance charges.

You pay lease charges on the $12,000 difference.

The result is that you can drive a new auto for low upfront cost and relatively low monthly payments. The downside is that you never own the vehicle and may have nothing to show for all your payments at the end of the agreement.

Remember that residual value mentioned earlier? Well that gets interesting at the end of the lease period. Auto lease companies usually set this at the low end of expectations. If you stay within the terms of your lease the chances are that the vehicle will be worth more than the residual value. This means you have 3 choices: 1. Buy the vehicle for the agreed residual value 2. Part exchange the vehicle and use the extra value as the deposit on your next lease vehicle. 3. Give the keys back and get on with your life

Auto lease companies claim that most people trade in and use the difference to pay their next deposit. Many auto leasers do this time after time going from one lease contract to the next. They like driving new vehicles and they don't vehiclee that they never own the vehicle at the end of the contract.

Now for the sanity check.

Auto leases are not meant to be cut short. Try to leave it early and you are likely to find yourself liable for all future payments. Over mileage payments can also be pretty high so auto leases suit people who are pretty sure just what their total mileage is going to be each year. If this fits your profile auto leasing can be a fantastic contract.