How Does Car Leasing Work?

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Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - February 26, 2020

If you’re looking for a lower monthly payment, or you want a new car every couple of years, leasing may be for you – if you’ve got good credit. If you have less than perfect credit, your chances of getting approved for a lease are slim, but it's not impossible. But how does car leasing work?

How Car Leasing Works

An easy way to explain leasing is that it’s similar to renting an apartment. When you rent, the dwelling doesn’t belong to you and you make payments to the landlord. You likely pay a security deposit, get renter’s insurance upon moving in, and pay cleaning fees once you move out. After the apartment is clean and ready, the landlord rents the place out again.

With a car lease, you make payments to drive the vehicle, pay the required fees, sometimes pay a security deposit, buy auto insurance when you get the lease, and return the car to the lessor (usually at a dealership) at the end of the term. The lessor then sells the vehicle at auction or to the dealer, who cleans it and sells it to someone else, usually as a certified pre-owned (CPO) car.

Terms Commonly Used in Car Leasing

Before you decide that leasing is the way you want to go, you should know what to expect. Let’s explore the jargon commonly used in the process of leasing a vehicle.

  • Lease – Contract by which a lessee borrows property from the lessor for a specific amount of time (term) after which the property is returned.
  • Security deposit – A fee the lessee sometimes has to pay to cover any damages that may happen to the car.
  • Capitalized cost – Or cap cost, the negotiated selling price of the vehicle plus, in most cases, an acquisition fee included in the monthly lease payment. The lower the cap cost, the lower the monthly payment.
  • Acquisition fee – A fee most leasing companies charge to arrange a lease.
  • Depreciation – With a lease, the lessee pays for the depreciation of the car that occurs during the lease term. Depreciation is essentially the loss in value over time that happens with nearly every vehicle.
  • Money factor – Essentially the interest rate on a lease. A better credit score means a lower money factor.
  • Disposition charge – A fee charged by the lessor for transporting and selling the car after the lease term ends.
  • Residual value – The lessor’s estimated amount the vehicle should be worth at the end of the lease, which is calculated before you sign.

What Is Involved with Leasing?

Checking your credit score is a good place to start when you’re thinking about leasing. According to Experian’s market data from the third quarter of 2019, only 6.29% of lessees had subprime credit – which they define as a credit score between 501 and 600. The majority of lesees, 78.34%, had a credit score above 660.

If you’re thinking about a bad credit lease, consider the pros and cons.

On average, the payment for leasing a new car is typically cheaper than a monthly loan payment for the same vehicle. However, if you have bad credit and you get approved for a lease, you may get charged a higher money factor. If you have a higher money factor, you may not be saving that much each month compared to an auto loan.

If you find a car you want to lease, factor in all the leasing fees (including the first payment, acquisition fee, dealer documentation fee, title and license fees, etc.). You may want to prepare a down payment, called a cap cost reduction, as well, to lower your monthly payment. You should also have an idea of how long you want the lease.

Keep in mind that leasing programs vary by vehicle and don’t always reflect the MSRP. If the car you had in mind is too expensive, look around at similar models from other manufacturers and evaluate your options.

As with most big purchases, do your research – especially if you’re struggling with credit issues. While you may be returning the vehicle at the end of the lease, it’s important to take your time. Test drive the car, ask questions, and think hard before you jump into anything.

Mileage and Other Considerations

Another aspect to consider is that there are mileage limits – normally between 10,000 and 15,000 miles a year – during the lease term. If you drive a lot, you pay extra if you go over your miles during the lease, which is typically 25 cents a mile. Most lessors allow you to purchase more miles up front, often at a lower rate.

While paying for extra mileage may be a deterrent at first glance, if you’re leasing for two years and you put 30,000 miles on a new vehicle, all you have to do is turn it in at the end of term and lease another car.

Another perk is the vehicles are new and under warranty, and some manufacturers also offer maintenance during your lease term. While you won’t gain any equity after paying for a leased car, what you gain is less stress from worrying about repair costs.

Last Word on Leasing

If you have good credit, leasing could be a great way to drive a new vehicle every two or three years, without the worry of paying for repairs. However, if your credit score is below 660, leasing may not be available to you. You may have better luck taking out an auto loan.

If you’re looking for a car, and don’t know where to start, start with us at CarsDirect. We’re teamed up with dealers nationwide who specialize in subprime financing. We can help you find a dealership in your area able to work with your unique credit situation. To get started, simply fill out our quick, free auto loan request form.

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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