Who wouldn’t want a new car at a very affordable monthly payment with the latest technology and design every few years? Leasing a car presents you with the luxury of getting a new car every few years, but you have to know how to get the best car lease deal for yourself.
Leasing a car enables you to drive a vehicle for a fixed number of months and miles. Unlike buying a car, it allows you to drive a new car for a specified period of usually two to four years. Leasing a car works on monthly payments for the lease period that is lesser than a car finance payment. It is like renting a house instead of buying one that involves fewer long-term commitments, but you still have to pay for its rent. Your lease agreement may offer you different options once your lease is over. Returning the car is the ultimate option, but a few leasing terms may also include a purchase option in their terms.
If you are new to a car lease, you must have various questions about what is a car lease, how it works, why leasing instead of buying it, how to lease a car with the best possible deal, and much more.
To answer all your questions and concerns, this article will cover all the aspects of leasing a car. There will be a lot of legal and financial terms you would want to know before leasing a car, so follow this detailed guide on how to lease a car?
Table of Contents
- 1 What is a car lease?
- 2 How does leasing a car work?
- 3 Leasing vs. buying a car
- 4 How to lease a car?
- 5 Mistakes to avoid when leasing a car
- 6 What credit score do you need to lease a car?
- 7 Why lease a car?
- 8 Is leasing a car a good idea?
- 9 From where can I get a car lease?
- 10 What to do after you have leased a car?
- 11 How to get out of a lease?
- 12 Ending your car lease
- 13 Conclusion
What is a car lease?
A car lease is a method of borrowing a car instead of buying a used or new car. It’s an agreement between a lesser and a lessee. Lesser is the company that owns the vehicle, whereas the lesser is the person paying to borrow the car. Some people also consider a car lease agreement nothing more than a long-term car rental. The duration of a car lease contract is usually three to four years. During this period, your lease agreement allows you to drive the car only for a fixed number of miles. The number of miles permitted is usually set between 12000 to 15000 miles per year. If you want a higher number of miles, you can change it, facing a higher monthly payment.
As you drive your car and utilize its miles, the vehicle’s value decreases due to the usage. The monthly payment of a car lease depends on your car’s depreciation. Depreciation is calculated as a difference between the car’s current value and the car’s value at the end of the lease. After the dealer analyzes the monthly payment, the lease fee, interest and taxes are added to it.
Let’s understand this with the help of an example. Assume a new car has a price tag of $30000, and after being driven for 48000 miles, its estimated value at the end of 4 years is 55 percent of its original value. The figures represent that the depreciation in that period of 4 years is 45 percent or $13500. So what happens now, your lease is paying for the lost value of $13500, plus the interest, taxes, and lease fee, divided over 48 months you would have the car.
When your lease is over, you are supposed to return the car in pretty good condition. If the care is returned with extra damages and excessive wear and tear, you will be charged for it.
Things covered in a car lease agreement
Your car lease agreement usually covers the following;
- The upfront payment of the lease (how much do you have to pay when the lease starts?)
- Duration of the lease agreement – typically three to four years
- The current and the estimated value of the car at the end of the lease
- Lease fee you will have to pay when the lease is up
- The interest rate of your monthly payments
- Termination fee in the case of returning the car before the lease ends
- Number of miles you are allowed to drive under the particular lease agreement
- The description of normal and excessive wear and tear
- What happens if you cannot pay a lease payment?
How does leasing a car work?
The discussion of whether to buy or lease a car is almost similar to buying vs. renting a house. Renting or leasing might seem convenient because of monthly financial payments, but it also has certain restrictions. If you buy a car, you are free to use it in whatever way you like and wherever you want to go. You will own the vehicle outright once the car loan is paid. The only expense you will be bearing would be the repair and maintenance, which is not covered under warranty.
On the other hand, you can’t own the car you lease. You pay a certain monthly fee to drive the vehicle under the set terms and conditions. The lease period is usually for three to four years, and you are only allowed to drive the car for a set number of miles per year. You pay an upfront fee at the start of the lease agreement, which is considerably less than the down payment of financing a car. During the lease period, you must follow the agreed rules and terms of the lease agreement and pay a particular monthly payment for a specific period of time. You might also be charged a fee if you drive the car more than the allowed number of miles. The lease agreement specifies the in-charge of repair and maintenance services that are not under warranty and lists the services that are covered by the warranty. Some leases demand the lessee to pay for such expenses, and in some leases, the lesser pays for them.
You should always make sure of the ending terms of the lease agreement before signing. When the lease ends, you return the car in good condition without extra wear and tear; otherwise, you get charged for excessive damages and the rough shape of the vehicle. You may also have to pay some additional fees to the lesser. Some lease agreements allow you to purchase the car at the end of the lease term. Others may only offer to renew the lease agreement.
Understanding the lease terms
So how does leasing a car work in practice? There are four essential terms you must know in order to understand your lease agreement.
- MSRP: MSRP stands for Manufacturer’s Suggested Retail Price, and it’s always non-negotiable in every lease agreement.
- Sale price (capitalized cost): This is the price you pay for the vehicle. It is negotiable and should be negotiated aggressively.
- Money factor: It is the amount you pay as your lease interest. It works similar to the interest you pay on loan. The manufacturer generally fixes the money factor rate, but you must ensure you get the best rate as dealers sometimes try to mark this rate up.
- Depreciation: The rate at which the vehicle’s value decreases over the duration of the lease.
- Residual value: It is the value of the car at the end of the lease. You may also have the option to purchase the vehicle at this value. The manufacturer also sets this value.
- Cap cost reduction: anything that helps decrease the price of the car is called cap cost reduction. It can be a down payment, a negotiated price, a special lease offer from a dealer, etc. Cap cost reduction helps in lowering your monthly lease payments.
- Lease term: the lease term is the duration of the lease, which usually is three to four years (or two to four in some leases).
- Security deposit: A security deposit is required with leases to protect the leasing company if you exceed the allowable mileage, damage the vehicle, or default on the contract. Your security deposit is fully returned if there are no costs at the end of the lease. If any costs arise, they will be deducted from the security deposit. If the amount you must pay exceeds the security deposit, you must find a way to obtain the cash and pay the difference when you return the vehicle. Security deposits are not required in all leases.
- Acquisition fee: It is a fee charged by the leasing company for establishing the lease. Some lessors will bargain the acquisition fee, while others will not. The fee must be paid either as part of your down payment or as part of your monthly payments. Acquisition fees typically range from a few hundred dollars to around $1,000.
- Due at signing: The money you have to pay when you sign the lease documents is called the amount due at signing. It typically does not include taxes or registration fees, so your total out-of-pocket cost may be significantly higher. The amount due at signing should consist of the majority of the leasing company and dealership’s fees. It is also referred to as the down payment at times.
- Buyout price: It is the price that you pay when you want to buy a car at any time during the lease. Buyout price decreases near the end of the lease term.
- Closed-end lease: In a closed-end lease, the car’s value at the end of the lease term is fixed at its residual value despite its market value.
- Open-end lease: In an open-end lease, the lessee is responsible for paying if there is a difference between market value and the vehicle’s residual value.
- Gap coverage: Gap (Guaranteed asset protection) is insurance that pays for the difference between the vehicle’s value and how much you owe on the lease.
Leasing vs. buying a car
Picking between buying and leasing a car is a tough choice to make. On the one hand, buying is expensive, but you own the vehicle in the end. On the other hand, leasing is cheaper with low monthly payments and allows you to drive an expensive car that you can’t afford to buy. Let’s have a look at some of the significant differences between leasing and buying.
- Ownership: In buying, you own the vehicle once the loan payments are made, whereas, in leasing, you have to return the car or renew the lease at the end of a lease term
- Upfront payments: Upfront payment in buying includes down payment, registration fee, taxes, and other fees, whereas, in leasing, the upfront payment includes the refundable security deposit, first month’s payment, a down payment, acquisition fee, registration, taxes, and other fees.
- Monthly payments: Monthly payments in buying are higher than the monthly payments in leasing because you are paying for the entire price of the vehicle, including interest, taxes, and other fees.
- Vehicle return: If you want a different car, you need to sell the car you bought. On the other hand, you return the vehicle at the end of the lease term, pay the ending costs, and walk away.
- Early termination: If you have bought the car, you can sell the vehicle and use the money to pay off the loan. On the other hand, if you end the lease early, your charges will be as much as continuing the agreement.
- Future value: When you buy the car, the vehicle’s cash value is yours even after depreciation. In leasing, the future value does not affect your financial situation as you don’t have any equity in the car.
- Mileage: You are free to drive your car as much as you want but are only allowed a fixed number of miles in a car lease, usually between 12000-15000 per year.
- Excessive wear and tear: You don’t have to worry about excessive usage if you buy the car, but it reduces your vehicle’s resale value. However, in leasing, you are financially responsible for the expenses caused by excessive wear and tear.
- End of term: At the end of the loan, you have built an asset and own it with no further payments, but in leasing, you can purchase the car, renew the lease or get a new lease.
- Customization: In buying, you can modify or customize the car as much as you like, but in leasing, you must return the vehicle in good condition after removing any customized or modified part you added.
How to lease a car?
When you make up your mind about leasing a car, you must follow the steps mentioned below to get yourself the best deal.
Set a budget
The most crucial step is to analyze your budget. You must figure out how much money you can set aside for down payment and additional charges when starting a lease. These extra payments may include an upfront payment to cover excess wear and tear, comprehensive and collision insurance, gap insurance, refundable security deposit, first month’s payment, acquisition fee, registration, and taxes.
Know your trade-in value
When leasing, it’s a good idea to keep your eyes on the capitalized cost. Allowing your trade-in to be bundled with the offer might confuse and enable the salesperson to manipulate the figures to trick you into thinking you’re getting a good bargain when you’re not.
Know your mileage
Before even thinking about getting a car lease, you must have a solid sense of how many miles you drive. A strict mileage allowance is included in almost every leasing deal. If you go above it, each mile will cost you between 15 and 50 cents, depending on the automobile and the contract you sign. Excess mileage charges must be paid at the end of the lease.
Know how to use your car
First and foremost, you don’t want to do anything that will cause your mileage to exceed the contract’s mileage limit. Second, you should avoid using your automobile for anything that can cause excessive wear and tear, such as ride-hailing services or even simple things like smoking or transporting a pet in the car. At the end of the lease, it could cost you money if you park on the street or in lots where your car may get scratches and dings. Finally, make sure you read your lease contract carefully for any activities that are prohibited. For instance, Some leases prohibit you from using the vehicle for commercial purposes.
Understand your credit score
Your credit score reflects your likelihood of meeting your financial obligations on time. You will need strong credit to lease a vehicle and an outstanding credit if you want an automaker-subsidized lease. Getting a car lease with bad credit is more expensive and complicated. Leasing will be pretty simple if your credit score is above 680. If it’s over 740, lessors will be competing for your business.
Compare the lease deals
Not every vehicle or model is available for lease. Because leased cars are frequently resold, dealerships typically lease their most popular models. Automakers occasionally offer leasing promotions, so it’s a good idea to look for lease bargains online or at your local dealership while you are in the market.
Negotiate the price
Unless you are getting a manufacturer-subsidized lease, you’ll want to haggle over the capitalized cost as you would when buying the vehicle outright. Do some research on the vehicle’s price and what other people are paying for it before going to the dealership. Some experts advise that you decide on a purchase price before approaching a dealer about leasing. Shopping at different dealers is a fantastic idea, and don’t be hesitant about informing each one that they aren’t the only one in the game. Dealers frequently trade models so that you may receive offers for the exact vehicle from multiple dealers.
Understand the additional costs
Pay close attention to the lease’s terms, including the monthly payment, capitalized cost, down payment, money factor, and any cap cost reductions such as lease deals or trade-ins. Ensure that they strictly meet the terms of your agreement. Do not sign any documents that are not correct. Even if the financial officer promises to remedy any problems or blank spots later, don’t sign anything unless you’re sure it’s accurate. It is considerably more challenging to make changes to legally binding documents after you’ve signed them than it’s to make sure they are correct in the first place.
Know the lease agreement
Leases come with a slew of expenses. It’s critical to understand which points are negotiable and which are not. Although many lessors will offer to roll costs into your monthly payments, the more fees you can pay upfront, the better. The bigger the number of fees included in your monthly payments, the more likely the lease’s buyout price will be higher than the car’s value. Registration and licensing fees are only negotiable if the dealer is marking them up. Negotiating the acquisition costs depends on the leasing firm. The disposition charge is usually non-negotiable; however, it may be waived if you instantly get a new lease from the same dealership when your old lease ends.
Mistakes to avoid when leasing a car
There are a few mistakes you never want to make if you are leasing a car.
- Do not make a huge upfront payment because you won’t get the money back if the car gets stolen, although the insurance will cover the loss. It is advised that you spend no more than $2,000 upfront. In some situations, it may make sense to pay nothing upfront and roll all of your fees into your monthly lease payment. If something goes wrong with the vehicle before the conclusion of the lease, you won’t have to pay the leasing company a large sum of money.
- Do not underestimate your mileage while signing a lease. Car lease typically allows you a mileage of 12000-15000 and charges you for extra miles used. You must know your driving habits, your daily commute, and the frequency of long travels. You could request a greater mileage limit if you know you’ll drive more miles than the agreement allows. However, because more miles equals more depreciation, this will almost certainly increase your monthly payment.
- Do not forget to get gap insurance as soon as you get your car lease. It will cover the difference between the value of the car and what you owe to the leasing company. If not insured, you will have to pay that difference from your pocket.
- Do not lease the car for a more extended period. Ensure that the lease period complements the warranty period; otherwise, you will have to pay for the repair and maintenance costs from your pocket.
- Do not ignore the routine maintenance and care for the car. If the vehicle gets in bad shape and the damages go beyond the acceptable wear and tear, it will cost you an additional expense of paying for the excess wear and tear. If the car is highly damaged at the return, you might even get charged a full market price for its repair.
What credit score do you need to lease a car?
Qualifying for a car lease gets more challenging if you do not have a good credit score. Typically, a FICO credit score of above 700 is required to qualify for a lease. In the second quarter of 2020, an average credit score of 729 was needed to get a car lease.
One benefit of leasing a car is that it strengthens your credit score if you make all the monthly payments on time and regularly.
How to lease a car with bad credit?
You can still get a car lease if you have poor credit; however, it may restrict you to limited options. You will have to look for such models which the dealer is eager to put on the lease. You will likely get a cheaper and old car with poor credit with bigger down payments. You may also have to obtain a qualified cosigner who has a good credit score and guarantees that you will make the monthly payments on time.
Why lease a car?
A few popular reasons why people lease a car are;
- It is less expensive. With the rising retail prices of many of today’s vehicles, leasing is generally the most cost-effective way to obtain a new vehicle. Leases typically have lower down payments and monthly payments than car purchases. A lease is also a great way to get a more refined new car for less money than you would have to pay if you bought it completely or cannot afford to buy it.
- You get a chance to change the car every few years. Some people are always looking for the latest and modern cars. Leases, which are typically for three years, provide a quicker turnaround time than the typical purchase cycle, which is about six years. Ending a lease is also a more straightforward method once the lease term is up. Assuming there are no over-mileage or excessive damage charges, you can return the leased vehicle and move on to whatever comes next, which is almost certainly another lease. This is much easier than purchasing a car with a loan and becoming dissatisfied with the vehicle even before the loan is paid off.
- Maintenance costs are typically lower because leases typically end before cars require major services or new tires. Leased vehicles almost always come with the original factory warranty, so owners don’t have to worry about repair costs as long as the warranty covers the problems.
Is leasing a car a good idea?
On the surface, leasing a car seems a more appealing option instead of buying one. It offers lower monthly payments because you are not paying back the principal amount in most cases. All you have to do is borrow and repay the difference between the vehicle’s value when it’s new and when it’s returned, along with some additional charges. However, is leasing a car really a good idea, and when should you lease one instead of buying? Let’s have a look at the upside and downside of leasing to reach a decision.
Benefits of leasing a car
- You get to drive a new car in its most trouble-free years. Since leasing terms only last for two to four years, you can get a new and better car every time you get into a new lease. You can try vehicles with the latest designs and technologies more frequently. As the car is usually new when you lease it, it’s less prone to repair, maintenance, and mechanical issues.
- Your lease covers the routine maintenance and oil-change expenses.
- You can get a better-equipped, high-price car which you might not be able to afford to buy.
- Your car will come with the latest safety and protection technologies.
- Worrying about the change in the trade-in value or the selling price is not your headache; it’s the lessor’s problem. When your lease is up, you will simply have to return the car.
- If you are a business owner, leasing a car can get you significant tax benefits.
- Leasing has a smaller down payment than a car loan’s down payment, so it could come in handy if you are tight on money.
- Leasing also has lower monthly payments than a loan’s monthly payment. So basically, you are driving the same car but for a lower monthly payment.
Disadvantages of leasing a car
- You lack ownership in leasing because you don’t own the car, hence no equity. You cannot sell it at any time you want to make some money in the time of need.
- You have limited mileage of normally 12000-15000. If you exceed your mileage, you will have to pay extra charges for that. It also restricts you from taking the car on a long tour or in any other state.
- There are plenty of additional charges in leases, such as interest, taxes, and other fees.
- Changing a car every few years can be attractive to many people, but for some, it’s a huge hassle to go through the process of switching vehicles every few years.
- When the lease term ends, leasing is usually more expensive than a loan because you are paying for the car during the period when it depreciates the most rapidly.
- If you get into another lease after ending one, your monthly payments will continue indefinitely. In contrast, the more value you get from a vehicle after the loan is paid off, the longer you keep it. Long term, the most cost-effective way to drive is to buy a car and keep it until it becomes uneconomical to repair.
- You will have to pay extra charges for the excessive wear and tear if you don’t maintain the car in good shape.
- Except for a few exceptions, such as window tinting, you cannot customize the car as per your choice because you will have to remove all the added features when you return the vehicle.
From where can I get a car lease?
Various car dealers and manufacturers are offering a variety of car lease deals. The availability of car models and lease offers may vary vastly based on your location. You can simply search the car lease dealers and manufacturers in your area and compare the deals to get the best deal for yourself.
What to do after you have leased a car?
Even when you close a car lease agreement and get your desired vehicle, there are still a few things you must do in order to protect yourself from hefty future expenses.
- Take good care of your leased vehicle. When you return your leased vehicle, you will be asked to prove that all the scheduled maintenance, payments for extra mileage, and other damage repairs are paid on time. If you don’t use your leased car carefully, the excessive wear and tear will cost you extra money at the end of the lease.
- To avoid defaulting on the lease and protect your credit rating, make your monthly payments on time. One way to keep the payments regular is to set automatic payments to the car lease dealer from your bank account. Missing the monthly payments or paying late will adversely affect your credit ratings. If your credit rating is not in great shape, you won’t be able to renew or get a new lease once the current one ends.
- Get Gap (Guaranteed asset protection) insurance on your lease car as soon as you get the car. Gap insurance pays for the difference between the vehicle’s value and how much you owe on the lease in case of any damage to the car or if it’s stolen.
How to get out of a lease?
If you are facing long-term financial issues or want to move to a different vehicle, there are a few ways that you can end your lease during the lease term. However, getting out of a lease before the end of the lease term can turn out highly expensive and damage your credit ratings.
Early termination of your lease agreement is an expensive way of getting out of the lease, but it’s better for your credit score than other methods. You are liable to pay an early-termination fee along with thousands of dollars to the leasing company in terms of the payments you will not make for the remaining lease term. Any extra mileage and wear and tear expenses are also added to that amount. If you deposit the security when getting the lease, that will be utilized as a part of the amount you owe at the termination.
To protect your credit score, it’s essential to follow the termination procedure properly. If you are terminating the lease due to financial crises, you won’t be able to meet the cost of termination, considering your financial state. In that case, the lesser can contact collections to recover the money you owe or even file a suit against you. Such scenarios are incredibly damaging to your credit score.
If you stop making your monthly lease payments, the leasing company will declare you a lease default. This is the worst way to get out of a lease, considering its impact on your credit score. Being a default will make it impossible for you to get any other lease for at least a very long period. With a lower credit score, you won’t be able to get a lower interest rate on a car loan if you plan to buy a car.
Purchasing your leased car from the lessor at its buyout price is an inexpensive way of getting out of your lease. You can further sell the car to a third party to get the money. If your vehicle’s condition is better than its current buyout value, a lease buyout is undoubtedly the best way to get out of a lease agreement. Lease buyout requires great timings as well. You will have to arrange a quick sale in order to pay off the lease and get the title to transfer it to the new buyer. The leasing company won’t release the title to you before you pay off the lease buyout.
With the approval of your leasing company, you can also transfer your lease agreement to someone else who can take over the remaining payments. You must make sure that the leasing company entirely takes off your name from the lease agreement after its transfer to a new individual. Taking off your name protects you from being liable in the future if the new lessor stops making the payments. There are matchmaking companies in the market that provide services of lease swamp and charge a specific fee for it.
Leasing a new car
Some lease companies will relinquish the penalties when you want to get out of a lease because you don’t have a financial hardship and just want a different or latest car. The only condition is that your new vehicle is the same brand as your returned car.
It’s fine if you’re closer to the end of your lease, but be cautious if you’re still in the early stages of your lease term, as they’ll roll your remaining lease costs into the new contract. There will be only one car in your driveway, and you will be paying for two.
Ending your car lease
You mustn’t default on the lease. The lease price is based on the assumption that you will make all of your lease payments until the lease expires, and it’s a legally binding contract. If you fail to make your payments, the lessor may hold you liable for all payments due at once and sue you for payments not made. Late or missing payments and defaulting one lease will make finding a new lease difficult, if not impossible.
If you cannot make any of your monthly lease payments, you should immediately contact the leasing company to figure out a solution. Most of the time, neither you nor the lessor wants to see a default. If the financial instability is for a short period, your leasing company may allow you to defer one or two lease payments. The missing payments will be paid at the end of the lease term, but they leave an adverse impact on your credit score.
Choosing a car lease rather than buying a car can be a terrific option to get a newer car with the most up-to-date technologies and the latest design and features for a lower monthly payment. However, make sure to do your research, shop around different dealers and manufacturers, and read the terms and conditions of the lease agreement meticulously to ensure that you get a lease that suits your driving habits and your budget the best.