Leasing a Car: How to Do It, Mistakes to Avoid

Leasing a car offers lower monthly payments and the flexibility of driving a new car every few years. You only pay for the car’s depreciation during the lease, not its full value. However, it’s important to understand the process and potential downsides before committing, as leasing may not be the best option for everyone.

What Is a Car Lease?

Leasing a car is similar to renting an apartment, but instead of paying a landlord, you make payments to the leasing company while following their rules on how you can use the car. Unlike financing, where you eventually own the vehicle, with a lease, you don’t own the car at the end of the term. You’re bound by a contract that restricts certain actions, like selling the car. When the lease ends, you typically have two options: return the car to the leasing company or dealership and pay any required fees, or buy the car if your lease allows it. Leasing offers a more affordable way to drive a new car, but it’s important to understand the terms before deciding if it’s the right choice for you.

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Key Terms and Fees to Consider in a Car Lease

• Acquisition fee. This is an upfront fee some leasing companies charge to cover the administrative costs of setting up the lease, usually ranging from $600 to $1,100.

• Cap cost reductions. These are adjustments, such as negotiating the sales price, trading in a car, or making a down payment, which can lower the car's cost and your monthly payments.

• Capitalized cost. This is the car's sales price, which is negotiable and forms the base for your lease payments.

• Disposition fee. A fee, typically a few hundred dollars, covers the cost of preparing the car for resale when the lease ends.

• Upfront fees. These include any initial costs, such as down payments, taxes, and registration fees, paid at the beginning of the lease.

• Gap insurance. Insurance covers the difference between the car's residual value and what your insurance pays if the car is totaled. Some leasing companies require it, and its cost may be included in your monthly payment.

• Mileage allowance and limits. Leases usually come with a mileage limit, such as 12,000 miles per year. Exceeding this limit may incur excess mileage fees, typically between 10 to 25 cents per mile.

• Purchase option agreement. Your lease may specify a buyout price for purchasing the car at the end of the lease term.

• Residual value. The estimated value of the car at the end of the lease affects your monthly payment. Cars with lower depreciation tend to have lower monthly payments.

• Security deposit. A deposit, often equal to one monthly payment, that the leasing company may require. It is refundable at the end of the lease, minus any penalties for damage or excess mileage.

• Leasing can be cheaper than buying. Lease payments are generally lower than loan payments, but keep in mind the long-term costs and that you won’t own the car.

• Car maintenance. While normal wear and tear is acceptable, excessive damage or neglect may result in penalties at the end of the lease.

• Early termination. Ending your lease early may incur penalties, including paying off the remaining balance on the lease.

Leasing vs Buying

• Initial costs. When you buy a car, you pay the full price upfront, either with cash, a loan, or a trade-in. When you lease, you only pay for the car's depreciation during the lease term, which is the difference between its purchase price and its estimated value at the end of the lease, plus interest and fees.

• Monthly payments. Buying a car usually means higher monthly payments since you're paying off the entire price of the vehicle. With leasing, your monthly payments are typically lower because you're only covering the depreciation cost and not the full vehicle price.

• Ownership. When you buy a car, you own it outright once the payments are complete. With leasing, you don’t own the vehicle; you return it to the dealership at the end of the lease term unless you choose to buy it.

• End-of-term options. After a lease ends, you have the option to return the vehicle, buy it, or lease a new one. With a purchase, once your loan is paid off, you own the car and can keep it for as long as you want, or sell it if desired.

• Long-term costs. Buying a car can be more cost-effective in the long run, especially if you keep the car for many years after it's paid off. Leasing may be cheaper short term, but if you lease repeatedly, you’ll continue paying monthly payments without ever owning the car..

Is Leasing Cheaper?

Leasing is cheaper because you’re only paying for the car's depreciation during the lease term, not its full price.

For example, if a 2024 Honda CR-V costs $30,000 and you make a $3,000 down payment, financing the car with a five-year loan at 5% interest results in a monthly payment of $510.

Leasing the same car for three years, with a residual value of $17,000, would result in payments of around $308 per month after the down payment. This saves you about $200 each month compared to buying.

However, once the lease ends, you must return the car and won’t get any money back. To keep driving, you’ll either need to start a new lease or buy the car, which means new payments. Over time, buying is usually cheaper, as you’ll eventually stop making payments.

Leasing Pros and Cons

Buying Pros and Cons

Should You Lease a Car?

Leasing can be a good choice if you prefer driving a new car every few years, want lower monthly payments, and don't want to pay for repairs, as the manufacturer’s warranty typically covers the lease period. It also requires a smaller down payment compared to buying.

Leasing is convenient if you want to return the car at the end of the lease without the hassle of selling it. It’s ideal if you drive less than 10,000 to 15,000 miles annually.

However, leasing may not be suitable if you have a long commute or take frequent road trips, as mileage limits and the need to return the car could be inconvenient.

How to Lease a Car

• Review your credit. Check your credit score to ensure you qualify for a lease. A score of 670 or higher is typically needed for a good lease deal.

• Assess your budget. Determine how much you can afford for a down payment and monthly payments, and don't forget to account for insurance, registration, gas, and other costs.

• Calculate your mileage limit. Estimate how many miles you drive each year to choose an appropriate mileage limit. Consider a higher limit to avoid costly overage fees.

• Choose a car. Test drive different cars to find the one you want to lease. Opt for a vehicle that holds its value well to secure lower monthly payments.

• Compare prices and terms. Shop around to find the best lease terms. Negotiate with different dealers to get the best deal possible.

• Negotiate the car lease. Understand all terms, such as the vehicle's cost, down payment, mileage limits, and interest rate (money factor). Many terms can be negotiable.

• Sign the car lease. Carefully review the lease to ensure the terms match your agreement, and only sign when you're comfortable with all conditions.

Conclusion