Guide to Leasing a Car: How It Works & How Much It Costs

Leasing offers lower monthly payments, access to newer models, and minimal maintenance costs,but comes with mileage restrictions, limited customization options, and no ownership equity. If you decide to lease, your payments may be lower than the payments for financing the purchase of the same car. Unlike a home, which appreciates over time, a car’s value decreases after leaving the lot leasing a car definition and generally continues to do so over time. Since you do not own the leased vehicle, you do not assume the risk of it being worth less than the anticipated residual value at the end of the lease term (closed-end leases only). The opportunity to cut nearly $300 from a monthly payment is an attractive one, and more and more shoppers are opting to lease cars rather than buying them.

Where can you lease a car?

You don’t have to make a payment each month, but you tie up your funds instead of being able to use them for something else. Buying a car with an auto loan generally means higher payments, with typical loan terms of three to seven years. But since it’s your car, you can drive as many miles as you want and sell or trade it whenever you wish. One major difference between buying and leasing is mileage limits. Lease agreements generally specify a certain number of miles per year, usually around 12,000 to 15,000 miles. That’s because the lessor bases the terms of the lease on anticipated depreciation, and anticipated value of the car after the lease period, and mileage is a big part of calculating that.

  1. There are also restrictions on how many miles you can drive, and you have to worry about bringing the car back in pristine condition.
  2. However, leases were available for those with a credit score of 600 or less.
  3. When you lease a vehicle, you pay to drive it for a certain length of time.
  4. You can figure out your equivalent annual percentage rate, or APR, by multiplying the money factor by 2,400.
  5. Going over the allotted annual mileage can result in mileage penalties.


You do not own the car and at the end of the term you’ll need to return the car to the dealer. This is different than buying, where you’ll own the car yourself. The lessor may require you to purchase gap insurance, which covers the difference between the amount you owe on your lease and the actual value of the leased vehicle if it is damaged or stolen. A closed-end lease means you’ve already agreed on how much the car’s value will decrease during your lease term.

Step 1: Know if Leasing a Car is the Right Option

If the car is worth less than your agreed-upon amount when you return it, you have no additional financial obligation. Ultimately, making an informed decision between leasing and financing a car requires careful consideration of your priorities, financial circumstances, and personal preferences. By understanding the differences and weighing the pros and cons, you can confidently choose the option that best suits your needs and ensures a satisfying car ownership experience. Remember, leasing may be suitable if you prefer driving new models frequently, have short-term transportation needs, or want to avoid the hassle of selling or trading in a vehicle. On the other hand, financing is ideal if long-term ownership, customization options, and the ability to sell or trade in the car are important to you. Similar to renting a home, leasing a car can be an affordable short-term option, especially appealing to those who value driving new vehicles and want the security of warranty and maintenance coverage.

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Add-ons like additional warranties can also increase dealers’ margins on leased cars. Leasing a car involves renting a vehicle for a specific period, usually two to four years, with monthly payments. Unlike financing, leasing doesn’t result in ownership of the vehicle. Instead, you have the right to use the car for the lease term, adhering to specific conditions outlined in the lease agreement. 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.

For the buyer, lease payments will usually be lower than payments on a car loan would be. In most states, any sales tax is due only on each monthly payment, rather than immediately on the entire purchase price as in the case of an instalment sale or loan. A lessee does not have to worry about the future value of the vehicle, while a vehicle owner does. Almost all leases include a fixed purchase price at lease end so if the vehicle is worth more than the predicted value, the lessee can buy it but if it is worth less, the lessee can return it. The consumer lessee also pays less sales tax over the life of the lease than purchasing the vehicle. Just as you can negotiate terms when purchasing a car, lease terms are also often negotiable.

Your insurance may not cover the entire loss if a car is totaled in a collision or stolen and not recovered. Gap insurance covers the difference that your standard car insurance does not pay, although the amount of coverage can vary based on state laws. It’s automatically included in some leases in the net cap cost, but isn’t a requirement. For example, if you drive over the predetermined mileage limit, you’ll owe an excess mileage fee that can be expensive. You’ll also pay an excess wear-and-tear fee if the car has damage that exceeds what’s acceptable.

It’s possible to reduce your gross capitalized cost — and monthly payment — by applying a capitalized cost reduction. Capitalized cost reductions are subtracted from the gross capitalized cost to calculate the beginning lease balance — they kind of function like down payments on a lease. If you trade in a vehicle or put cash down, your gross capitalized cost will be reduced by the amount of the capitalized cost reduction.

Whether it’s a new EV or a full-size pickup truck, he’s eager to drive it and tell you all about it in a CarGurus Test Drive Review. Besides contributing to CarGurus, Stephen currently has bylines at Digital Trends, Green Car Reports, and Motor Authority. “Expert verified” means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced.

With your own car, you may delay fixing a minor dent or scratch, but with a leased car, these things can be costly in the form of excess wear-and-tear fees. Leasing a car can be less expensive than buying, especially when you factor in the rising new car prices in the market. It also allows you to get a newer vehicle without the huge upfront costs and time spent getting approved for a loan and issuing a down payment. Another advantage is that your maintenance costs are likely to be less.

Learn what questions to ask so you can make the best choice for you. Note that you can buy additional miles upfront if you think you’ll be over the allotted miles. When weighing whether leasing or buying a car makes the most sense, you’ll want to consider your personal driving habits and preferences. But leasing a car isn’t the best choice in some situations, such as if you rack up a lot of miles driving.

Before choosing the road you go down, it’s important to understand the key distinctions between leasing a car and buying one. One of the first things to ask yourself before you need another car is whether you plan to buy or lease a vehicle. If leasing is on your mind, there are a few things you should know about the process before you begin. When it comes to cars, Matt’s curiosity extends well beyond the powertrain. From Ford to Porsche, he’s as interested in the history behind the machine as he is in the view behind the wheel. Matt has been working on the journalism side of the auto industry since 2014.

Dealerships may refuse to lease a car if you have bad credit, so it’s important to check your credit score beforehand. And as with negotiating a car loan, the better your credit, the more favorable the terms are likely to be. If you’re the type who’d rather drive a car into the ground, buying is the clear answer.

However, if the practice is continued over time, it may prove more costly than simply buying a new or certified pre-owned vehicle. Usually, the cost to secure a lease is lower than the cost to finance a purchase of the same vehicle. You should, however, still account for taxes and fees that can add to the upfront cost. Monthly car loan payments are calculated based on the sale price, the interest rate, and the number of months it will take to repay the loan. Leasing usually involves a smaller down payment compared to buying.

You don’t have a trade-in, and you’re not interested in making a down payment. After a bit of negotiation, you’re able to work the dealership down to an even $25,000. The anticipated residual value of the Impreza after 3 years is $16,000, and the dealer is offering to lease it for 36 months with a money factor of .0023.

Just remember that at the end of a lease, you won’t automatically own the car. Consider your lifestyle, whether you want to own a car and your budget before deciding whether to lease or buy a new car. Depending on your desires and lifestyle, it can still make sense to lease instead of buy. In the long run, buying has proven to be a better financial decision. We’re the Consumer Financial Protection Bureau (CFPB), a U.S. government agency that makes sure banks, lenders, and other financial companies treat you fairly. Leases are generally three years long (36 months), although longer and shorter leases may be available.

When you buy a car, you can keep it for as long as you choose to. Usually, you’ll make a higher down payment and slightly higher monthly loan payments (if you finance your purchase) compared to lease payments for the same car. is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories, except where prohibited by law for our mortgage, home equity and other home lending products.

According to a 2022 study by AAA, the cost to drive a new car for about 15,000 miles came to $10,728. You also have complete control over how you improve your car or, for instance, modify its appearance. If you financed its purchase, once that loan is paid off, you can keep it until it dies, trade it in, sell it outright, or give it to a family member.

Going over the allotted annual mileage can result in mileage penalties. To understand how to evaluate leases, we need to understand how the dealership comes up with its monthly payments. Typically a leasing company will have a minimum length of lease such as 24 months up-to 60 months. Recently a new view on leasing is that the market has grown for short term lease called ‘flexi-lease’. Flexi-lease is when a person can lease a new vehicle for 3 months and then choose to hand the car/van back or indeed extend the lease for another period. This is almost the same as van hire but typically involves the finance or leasing company maintaining and being ultimately responsible for the vehicle.