When you need a vehicle to get around, you have two basic options: buying one or leasing one. Leasing a vehicle is similar to renting an apartment in that you make monthly payments while enjoying temporary use of the vehicle.
A lease may be an attractive option if you’re not interested in owning a car right now or you prefer to drive newer vehicles. Before entering into a leasing agreement, however, it’s important to understand how leases work and the restrictions they may impose.
How Car Leases Work
When you lease a car, you aren’t the owner; you are simply borrowing the car for a set term and paying a fee to use it.
The agreement that you’ll sign outlines the length of the lease, your monthly payments, the maximum number of miles you can drive per year, and other terms. When the lease ends, you’ll typically have the option of purchasing the vehicle or simply returning it. If you return the car, the dealer will expect it to be in good shape. If it has any damage beyond the expected wear and tear, you’ll have to pay more money to cover it.
Leasing might be better than buying for some drivers, for several reasons:
- You can drive a newer vehicle. By leasing instead of buying, you can usually drive a newer car than you would be able to afford otherwise. With the latest model, you can enjoy the latest convenience and safety features. For some status-conscious drivers, a new car is a matter of prestige. For others, their work may require one.
- You don’t have to worry about maintenance. Since leased cars are generally new, you’re unlikely to face costly repairs, just routine maintenance, such as oil changes. Your lease term likely will end well before the car needs major work or new tires. Some leases also cover maintenance costs as part of the contract.
- You’ll likely have a lower payment. Your payments typically will be less than they would be if you purchased the same vehicle with a car loan. The average monthly payment for a financed car is $617, or $111 higher than the average monthly payment for a leased vehicle.
Costs to Expect When You Lease a Car
The monthly payment isn’t the only expense that you’ll have when you lease a car. Leases can also involve these costs and fees.
1. Down Payment
Dealerships often will require you to make a down payment to lease a car. The down payment, sometimes known as a capitalized cost reduction, can vary based on your location, the dealer, the value of the car that you’re leasing, and any promotions that are in effect. Typically, the amount can range anywhere from $0 to several thousand dollars.
2. Monthly Payments
Your monthly payment is the fee that you pay for using the car. Payments are based on the car’s value and expected depreciation during your lease term. You can reduce the monthly payment by making a larger down payment or trading in a vehicle.
You usually have to make your first monthly payment on the day when you sign the lease agreement. That payment is in addition to the down payment.
3. Acquisition Fee
Most dealers will charge an acquisition fee, also known as a bank fee or an administrative fee. It is supposed to cover the dealer’s paperwork and related costs, and it usually runs from $395 to $895.
4. Money Factor
The money factor is essentially the interest rate on the lease, but it’s expressed in a decimal format. Dealers will use your credit score to determine your rate. The better your credit, the lower the money factor rate should be.
To convert a money factor to a conventional interest rate, multiply it by 2,400. For example, if the money factor is 0.0015, then you would multiply it by 2,400 and get an interest rate of 3.6%.
5. Return Fee
The return fee—also known as a disposition fee—comes at the end of your lease term when you bring the vehicle back to the dealership. It pays to clean and repair the vehicle to prepare it for sale. The return fee is usually about $350.
6. Extra Mileage Charges
Lease agreements include an annual mileage maximum, such as 12,000 to 15,000 miles per year. If you return your vehicle at the end of the lease with more miles than the annual maximum allowed, then you’ll have to pay extra mileage charges.
Extra mileage charges can be significant. Depending on the type of car that you leased, they can range from 10 cents to 25 cents per mile.
For example, let’s say you leased a car with an annual mileage maximum of 12,000 miles and a three-year term. After your lease ends, you return the car with 40,000 miles—4,000 over the agreed-upon limit. If your contract states that you’ll be charged 20 cents per mile over the limit, then you will have to pay $800 in extra mileage charges.
7. Wear-and-Tear Expenses
While some wear and tear is expected to occur during your lease, excessive damage will cost you. If you return the car with dents, scratches, stains to the upholstery, worn tires, and/or cracked glass, or if you didn’t follow the vehicle’s maintenance schedule, then the dealer can charge you excess wear-and-tear fees.
Depending on your state of residence, you may have to pay the full cost of any repairs, or there may be a cap on how much the dealer can legally charge you.
Pros of Leasing a Vehicle
Leasing a vehicle may be a good option if you’d rather not own one outright. The benefits of leasing include:
- Being able to drive a new or newer vehicle every few years
- Potentially lower monthly payments compared to financing a vehicle purchase
- Needing a smaller down payment to qualify for a lease versus a car loan
- Having the option to purchase the vehicle at the end of the lease term
Signing a vehicle lease allows for flexibility because you’re not locked into the vehicle for the long term. When the lease expires, you can switch to a different vehicle if you’d like or move ahead with purchasing a car, if you’re ready. Assuming that you stick to the lease terms, it can also be cheaper than buying a car, at least for the duration of the lease term.
When insuring a leased car, you may want to consider adding gap insurance. It will pay the difference between the value of the car and the payments remaining on your lease if the car is totaled in an accident.
Cons of Leasing a Vehicle
There are also some things that can make leasing a less attractive option than buying a car. Here are a few of them:
- You will be limited in the number of miles you can drive, such as 10,000 or 15,000 per year.
- Penalties for exceeding the mileage limits can be steep.
- You may also be penalized for excessive wear and tear.
- Getting out of a lease early if you need to can prove expensive.
Another downside for some people is that they’re not permitted to customize the vehicle, which is something you can do only if you’re purchasing one instead.
Be wary of “lease here, pay here” dealerships, which tend to cater to people with poor credit histories. They may charge more or offer fewer benefits in terms of maintenance and repairs.
Negotiating a Vehicle Lease
Just as you can bargain with the dealer when you’re buying a car, the terms of a car lease are often negotiable. Depending on the dealership, any of the following may be up for negotiation:
- Vehicle cost
- Down payment requirements
- Rent charges, which determine your monthly payment
- Mileage limits
- Purchase options
You may also be able to negotiate other features of the lease, such as penalties for exceeding mileage limits or incurring excessive wear and tear. Again, this will depend on the dealership and its policies.
Before you attempt to negotiate a vehicle lease, there are a few things you can do to make sure you’re prepared financially. For instance, it’s helpful to check your credit score because dealers may want to verify that you have good credit before offering lease terms. The better your credit, the more room you may have to negotiate.
It’s also good to consider what you can afford to pay each month and how much money you will be able to put down at the outset. Using an online lease payment estimator can help you get a feel for what you might pay to lease a vehicle each month, based on the type of car you want. That can also be useful for estimating your total costs over the entire term.
Finally, consider what your plans may be for when the lease expires. If you’d like to eventually purchase the vehicle you’re leasing, for instance, you’ll need to have cash on hand or be able to qualify for financing. Comparing the best auto loan rates online can help you find the right financing option when the time comes.
When weighing whether leasing or buying a car makes the most sense, you’ll want to consider your personal driving habits and preferences.
For example, if you typically drive less than 10,000 or 15,000 miles each year and you like being able to drive a relatively new vehicle every few years, then leasing could be a good fit. On the other hand, if you’re interested in making more of long-term investment or you drive well over 15,000 miles each year, then you may be better off buying a vehicle instead.