How Does Leasing a Car Work?

If you like to drive a new car every few years, it can be an attractive option

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.

Key Takeaways

  • A vehicle lease is an agreement in which you get to use a car for a specified period of time in exchange for monthly payments.
  • Leasing a vehicle may be preferable to buying one, depending on your financial situation.
  • Violating the terms of your vehicle lease through excessive mileage or wear and tear could have unintended financial consequences.
  • You may have the option to buy the vehicle when your lease expires.

Vehicle Leasing Explained

When you buy a car, you take ownership of it. If you're financing the purchase, you'll own the vehicle when you've paid your car loan off in full. If you're paying cash, you'll own the vehicle outright at the time of the purchase.

Leasing a vehicle is different. Rather than owning the car, you're paying a dealership for the right to use it for a set period of time, typically two to four years. You'll make payments monthly, the same way you would if you were repaying a car loan. But at the end of the lease payment period, you don't own anything.

How a Vehicle Lease Works

A vehicle lease is essentially a contract between you and the car dealership from which you're leasing. When you sign a vehicle lease, you're agreeing to certain conditions set by the dealership. Those conditions can cover things such as:

  • The term of the lease
  • Number of miles you're allowed to drive per year
  • Total number of miles you're allowed to accrue during the term of the lease
  • Penalties for exceeding the mileage limits
  • Maintenance requirements and responsibilities
  • Monthly lease payments and how they're calculated
  • What happens if you miss a lease payment
  • Rules regarding early termination of the lease

Your lease may also specify what your options are when the lease term ends. This may include extending the lease on the same vehicle, exercising a purchase option to buy the vehicle at an agreed-upon price, or signing a new lease on a different vehicle.

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.

Tip

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.

Important

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.

The Bottom Line

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 a long-term investment or you drive well over 15,000 miles each year, then you may be better off buying a vehicle instead.

Article Sources

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  1. Consumer Financial Protection Bureau. "What Should I Know About the Differences Between Leasing and Buying a Vehicle?" Accessed May 13, 2021.

  2. Federal Reserve Board. "Keys to Vehicle Leasing." Accessed May 13, 2021.

  3. Federal Reserve Board. "Negotiating Terms and Comparing Lease Offers." Accessed May 13, 2021.

  4. Federal Trade Commission. "Financing or Leasing a Car." Accessed May 13, 2021.