Understanding the costs of leasing a car

If you’re someone who likes to get behind the wheel of a shiny new car every few years, leasing a car may be an option to explore. When you lease a car, you essentially enter a rental agreement between you and the leasing company allowing you to use the car for a certain number of months. While the cost of leasing a car could be lower than the monthly payment for purchasing the same car, there are other costs to consider.

Upfront costs of leasing a car

Let’s start by taking a look at some of the key terms you’ll encounter as a lessee when it comes to the upfront costs:

• Capitalized (“cap”) cost: Essentially, this is the agreed upon value of the vehicle, in addition to other things like tax, title, license and fees. If you decide to purchase optional Voluntary Protection Products such as paint and fabric protection or tire and wheel protection (to name a few), the cost may be included in the capitalized cost.
• Adjusted capitalized cost: A vehicle trade-in or down payment are often known as cap cost reductions or adjustments, and the final price you pay is your adjusted capitalized cost.
• Residual value: The lessor’s expected value of the car at the end of the lease, accounting for expected depreciation.
• Acquisition fees: Administrative costs charged by the lessor associated with originating the lease.
• Rent charge: The cost you pay the leasing company in addition to depreciation to be able to lease the car. The rent charge is typically part of your monthly payments.
• Amount due at signing: The total upfront, out-of-pocket cost to drive off with the vehicle. The amount due at signing, sometimes called the drive-off cost, typically includes your down payment, first lease payment, and any applicable taxes, registration costs, security deposits or other fees when leasing a car.

So, what does all of this mean? In simpler terms, to lease a car, you will pay the adjusted capitalized cost minus the residual value (i.e., the vehicle’s depreciation), plus a rent charge. That amount is then spread over the life of the lease in monthly payments.

Ongoing costs of leasing a car

Once you’ve paid your upfront costs and driven off the lot, your focus will shift to your lease’s ongoing costs:

• Monthly payment: Your monthly payment is likely the most significant recurring expense you’ll have associated with your lease. This consists of the rent charge, taxes and ongoing depreciation on the car. The lattermost is calculated by subtracting the residual value from the net capitalized cost, and then dividing that by the term length of your lease.
• Insurance: Insurance is generally mandatory when financing a car, but leasing agreements are typically even more stringent. Lessees are often required to carry comprehensive and collision insurance to cover potential damage to the leased car in addition to the more standard liability and injury insurance most states require drivers to have.
• Maintenance: A regular car maintenance schedule is considered good practice for all drivers, but it can be more important when you know you have to bring the car back to the dealership in good condition. Many lease agreements stipulate lessees get maintenance at set intervals. Some dealers may even offer this service, though this may be an additional cost.
• Fuel: Whether you’re buying, leasing or even renting for the short-term, your car can’t run on an empty tank. Refueling will be a recurring cost to contend with whether gas, diesel, or flex-fuel.

End-of-term costs of leasing a car

Once you’ve reached the end of the road with your lease, you’ll need to decide if you will buy the car (if your lease contains a purchase option) or if you will close out your agreement. If you decide to return the leased car, here are some of the costs you can expect at this time:

• Return (“disposition”) fee: At the end of your lease, you may be asked to pay what’s known as a disposition fee, which covers the leasing company’s cost for closing out your lease.
• Excess wear and use: Leasing companies typically outline what constitutes “normal” or expected wear and use on a car during your lease. If the car is returned in worse condition than what was allowed — broken windows or damaged upholstery, for instance — you’ll likely be on the hook for additional charges.
• Excess mileage fee: Most lease agreements have a maximum mileage that you aren’t allowed to exceed. If you drive for more miles than what’s covered by your lease, you’ll typically have to pay an excess mileage charge. This is often assessed per mile that’s in excess.
• Early termination fee: A leasing agreement is a contract. As such, there’s usually a charge if you choose to end a lease before the end of the contract.

In summary

The cost to lease a car goes beyond just the sticker price. At the outset, you have to consider various fees, taxes and registration costs. You’ll also need to consider your ongoing costs of maintenance and required insurance coverage. Finally, you’ll need to plan for your end-of-term costs such as the disposition fee and any excess mileage or wear and tear. Understanding the true cost of leasing a car requires coming to terms with these additional costs alongside the advertised price to determine if leasing a car is the right option for you.