How to Lease a Car? Here’s What You Should Know

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Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

, Automotive Content Editor - April 30, 2024

Leasing a vehicle isn't like buying one with an auto loan, although the process works similarly. When you lease you are taking on a new car for only a short amount of time, typically no more than 36 months, and then you return the vehicle to the lease company and can choose to either purchase the car, lease another vehicle, or walk away. Here are some of the key points you should know about leasing a car.

What is Leasing a Car?

Car leasing is when you take on a vehicle for a short amount of time, typically with the intent to return the vehicle to the dealership after two or three years. When you lease you're only paying for the portion of the vehicle you use. You pay the portion of the MSRP that you use, depreciation, and a money factor, which is what interest is called in leasing.

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.

Most leasing companies offer leasing only on brand-new vehicles. Terms are typically around two to three years, and most lessees choose to lease because the monthly payments are typically more affordable than financing a new car.

The cost breakdown of leasing is quite different from financing since you’re not buying the vehicle. Leasing companies determine the cost of a lease by estimating residual value, or what the car is likely to be worth at the end of the lease. You’re paying for the depreciation of the vehicle, not its entire value, which is why leasing is usually more affordable month to month than financing.

Once your lease is over, you can return the car to the dealership and lease again, buy it, or just walk away. Many lessees continue to enter lease agreements year after year because many leasing companies offer loyalty programs and discounts for repeat customers.

Understanding the Key Leasing Terms

Before you decide that leasing is the way you want to go, you should know what to expect. Leasing terms and language can be foreign to people who’ve never leased. The way the cost of a lease is calculated is pretty different from auto financing, too, and it can be overwhelming the first time you look over a leasing contract.

Before you jump into a lease, here’s some leasing-specific jargon you should know:

  • Lease – Contract by which a lessee borrows property from the lessor for a specific amount of time (term) after which the property is returned.
  • Lessee – The person who leases the vehicle.
  • Lessor – The leasing company. They own the car and hold the title.
  • Security deposit – A fee the lessee sometimes has to prepay 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.
  • Cap cost reduction – Anything that lowers the cap cost, such as a down payment, trade-in equity, or rebate. A cap cost reduction lowers your 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 residual value of the vehicle has a huge impact on the final price of the car when you lease it. It refers to the price of the vehicle that the owner expects to sell the vehicle for when it's at the end of the lease period. The higher the residual value, the lower your lease payments. However, if the residual value of the car is high, that's the price you'll be paying if you decide to purchase the car at the end of your lease.
  • Open or closed lease – An open lease is mainly used for business (commercial) purposes. The lessee pays for the price difference between the residual value and the resale value at the end of the lease. In a closed lease, the lessee only pays for extra mileage and any damages done to the vehicle. Most lease types will be closed, providing you with a better value.
  • Lease term length – Most leases are for 24, 36, or 48 months. The price per month differs depending on the length of the lease. The shorter your lease, the lower the price. The longer your lease, the higher the price per month. This is because, in shorter leases, there is less wear and tear on the vehicle. Make sure you ask about a bumper-to-bumper warranty and don't extend your lease past this date.
  • Mileage limits – When you sign into a lease, you'll be subject to a limit on how much mileage you can put on the vehicle. Most standard leases are set at 12,000 miles per year, but it is worth it to purchase the extra mileage, especially if you think you will go over the standard mileage. If you drive in excess of the mileage set forth in the lease, you'll have to pay extra when the lease expires.
  • Fees and payments – When leasing a vehicle from a dealer, there are usually fees added on, such as an acquisition fee. You can sometimes negotiate these payments down lower than what they offer or even sometimes negotiate them completely out of the lease. Some dealers will also ask for a down payment.

Because you don’t own the leased vehicle, leasing companies have mileage restrictions, charge extra for excessive wear and tear, and require that you carry full coverage auto insurance. If you’re rough on the vehicle, you can expect extra fees because most leasing companies prep off-lease cars to be sold as CPO vehicles once they're returned.

Requirements for Leasing a Car

Like auto loans, leasing has specific requirements depending on the leasing company. However, there are a few basics that you need, just like when you finance a loan. These include:

  • Good credit – Leasing a car typically requires good credit. The better your credit the better the lease terms and money factor rates you're likely to get.
  • Consistent income – In order to lease a vehicle you must have a steady income.
  • Proof of Insurance – Like with a loan, valid insurance is required in order to drive a leased vehicle.
  • Valid Driver's License – A valid driver's license is required to take on a lease.

How to Lease Your Car

  1. Find the vehicle. First, you should find the vehicle that you are looking to lease. Determine if the desired vehicle has a lease option available and if there are any limitations. This is important because it would be difficult to move to negotiate a lease option on a vehicle where such an option does not exist.
  2. Review lease options. After you select the car, inquire about the options on the lease. Find out if there is an opportunity to purchase additional miles for the vehicle to avoid mileage penalties. You may enjoy the vehicle during the lease term and decide at the end that you want to buy it out for ownership. Understanding the availability of such an option at favorable terms can be useful in your decision-making process.
  3. Understand the terms of the lease. The terms of the lease factor into the price you will pay for the vehicle. Consider such variables as lease incentives, the number of lease years, and the amount of down payment or pre-payment that will influence costs and help hold your monthly expenses down.
  4. Sign the lease contract. Once you have completed these steps, you should be in a position to sign the lease agreement and take possession of the vehicle. Be sure to read the fine print and in the case of a pre-owned vehicle or a car whose lease you are taking over, have a thorough inspection performed. The acquisition of a pre-owned vehicle is subject to the same state lemon law protections as cars purchased new from the dealer.
  5. Determine what to do at the end of the lease. At the end of your lease, you probably have four options: return the car, buy it, trade it, or extend the lease. If you return the car, you have to pay excess mile usage and any damages other than normal wear and tear. If the car has built-in value, you may want to buy it to avoid losing your investment.

How to Get the Best Lease Rates?

Getting the best lease rates depends on your situation and what you're looking for in a lease. Without a doubt, the best way to get the lowest lease rate is to have stellar credit. The better your credit is the better the terms of your lease are likely to be.

You can also shop around for the automaker that's running the best lease deals at a given time.

Is a Lease Car Right for You?

When you’re considering a lease car make sure to determine if it’s the right choice for you. All things being equal, leasing a car vs. buying a car can be a tough choice. But, sometimes, your situation can help make that choice clearer.

If you need a daily driver to get to and from work and to run errands, and only occasionally go out for an extended drive, a lease can be a great alternative to financing a new car. It’s also a good deal for someone who’s particular about car care and wants to drive the latest and greatest vehicle every few years.

On the other hand, if you have a long commute to work on a daily basis, frequently drive to out-of-town destinations, play soccer mom to the whole team, or drive around with your dog daily, a lease might not be right for you. In situations like these, mileage restrictions and extra wear and tear can cost you in the end. Another thing to consider: if you’re accident-prone, minor dings and scrapes can really add up when you turn in your lease vehicle at the end of its term.

One other situational factor to consider is your credit. It can be difficult to qualify for a lease deal if you’re struggling with low credit. Car leasing tends to be easier to come by if your credit is 700 or higher.

Related Questions

We could go on for longer about all the ins and outs of leasing, be we digress. Here are just a few more questions related to leasing a car that you may need an answer to.

Is PCP Car Leasing Different from Normal Car Leasing?

PCP car leasing (Personal Contract Purchase) is a hybrid type of car lease that ends up somewhere between an outright purchase and a standard close-end lease that allows you to purchase the vehicle for its residual value at the end of the lease term. In other words, PCP leasing and standard car leasing is pretty much identical, although there is a tacit understanding between you and the dealer that you will purchase the vehicle come the lease term end. If you do not intend to do that, then your lease would be considered a PCH (Personal Contract Hire) where you just drop the keys off and walk away. This is the traditional closed-end car lease.

Can You Change the Terms of a Car Lease Agreement?

Short of rewriting the entire car lease agreement, you cannot change the original terms of a car lease agreement, as it is a contract between you and a car dealer. Of course, you can revisit the lease itself and then go through the process of rewriting the terms of the lease to cover your changed circumstances. However, unless you opt for the rewrite with a written request, you cannot simply amend or change the terms of a car lease agreement. If you have a closed-end or "walkaway" lease, the dealer will not be likely to reopen your lease under any circumstance, because the residual and payments are also set, so it makes no sense.

Is It Possible to Do an Auto Lease Trade and Assume the Lease of the New Car at the Same Time?

Yes, it is possible to do an auto lease trade and assume the lease of a new car at the same time. However, to ensure the process goes as smoothly as possible, you should verify that you meet the credit requirements for the lease you intend to assume. For example, your personal credit history may not let you have two open auto leases at one time, so it would be necessary to trade your current lease and get it off your credit report before you continue the process of assuming the lease of a new car. Additionally, you should make sure the person who wants to trade, meets the credit requirements as well.

What is a Car Lease & Contract Hire?

Car lease and contract hire are leases for a specific purpose. Normally, a car lease is for a specific number of miles to be driven and for a specific number of years to be paid. It is based on an "intrinsic value" that projects what your car will be worth in the future. Normally, you just walk away from this "closed-end lease", as it is known. A contract hire is an "off-the-books" lease that allows you to run up the mileage on a vehicle quickly. It is used when the vehicle will not be held long by the lessee and tends to be rather expensive. A car lease or a contract hire may be for a specific event, and you then return the vehicle to the dealer.

How Does Insurance Work on a Lease?

Insurance works much the same way on a lease car as it does on a car with a loan. You need to carry full-coverage insurance which is a combination of liability, uninsured motorist coverage, collision insurance, and comprehensive insurance. Many lease car contracts may also include GAP insurance, which covers the difference between the value of the vehicle at the time of an accident and the total amount you owe. This can help to cover you if you owe more than the vehicle is worth at the time of an accident. If GAP isn't already included in the cost of your lease, you should consider adding it through your insurance company.


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, Automotive Content Editor

Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.

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