Are you the type of person who wants a new car every three or four years? If so, leasing can be a cost-effective alternative to buying. In the third quarter of 2022, about 18% of new cars were leased rather than purchased.
The average monthly payment for a leased car was $540 in the second quarter of 2022, but the costs don’t stop there. If you’re thinking about leasing a new vehicle, here’s what you need to know about how leases work and what you can expect to pay.
- About 18% of new cars were leased in Q3 2022.
- Lease payments are generally less expensive than financing payments on a new car.
- The average car lease payment in Q2 2022 was $540 per month, and the average lease term is 36 months.
- Leases also may require down payments, plus acquisition fees up front.
- You face additional fees when you return the car at the end of the lease.
How Car Leases Work
When you lease a car, you don't own it; 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 additional 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 might 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. You'll most likely just pay for 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 monthly 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 $667, or $127 higher than the average monthly payment for a leased vehicle.
7 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 $595 to $1095.
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 before returning it. 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. Excess Wear-and-Tear Fees
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.
Is It Better to Lease or Finance a Car?
That depends on your financial needs and goals. Monthly payments on a lease are usually less than those on a car loan. And if you don't mind essentially renting a car and not owning it at the end of the lease term, then a lease might be a better choice. Restrictions on use and other expenses are involved so be sure that you understand all costs before you sign a lease agreement.
What Are the Disadvantages of Leasing?
For one, the mileage restriction and associated fee if you exceed it may inhibit your use of the car. Not owning the car when the lease ends can be another disadvantage for some people. There are numerous costs you must account for in addition to the monthly payment. And, ultimately, you pay more for repeated leasing than if you buy a car and keep using it (and getting your money's worth) for years.
Does Leasing Ever Make Sense?
Financially, it may if the monthly payment is less than what you'd pay on a car loan for the same vehicle, you stay under the annual mileage cap, and you avoid excessive wear and tear. Also, if you're someone who just wants or needs to have a new car every few years and money isn't plentiful enough to buy one that often, it can make sense.
The Bottom Line
Depending on how many miles you drive each year and your budget, leasing a car may be a good option for you. Just like buying a new car, it pays to comparison shop among dealers and to learn what terms may be negotiable. Before signing a lease agreement, review the different fees and restrictions carefully to avoid a costly surprise later.