Guide to leasing a car
If you're looking for a new vehicle, one option is to lease. While buying a car gives you access to that vehicle indefinitely, leasing a vehicle means you'll generally only pay for the time you drive that vehicle before returning it to the dealer at the end of the lease term. Wondering how to lease a car? In many ways, it's a similar process to purchasing a car. In both scenarios, you and the dealer can negotiate the price of the vehicle you are interested in, which will influence the monthly payments you'll make. Leasing a vehicle isn't for everyone, but if it's an option you're considering, there's more you'll need to understand.
What does it mean to lease a car?
Leasing a car is fundamentally different from purchasing one, and each option comes with its own set of benefits and drawbacks. When you lease a car, you're signing an agreement to rent the car for a specified term (generally a few years). 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.
Many people elect to lease a car to secure lower monthly payments, pay less cash out-of-pocket, and gain peace of mind afforded by the manufacturer warranty and maintenance coverage. Leasing is also attractive to those who prefer to drive the newest body style or enjoy the latest technology. A lessee is not bound to their leased vehicle indefinitely, nor do they have to worry about selling it when they are ready to get into a new model.
However, because leasing a car is not the same as buying a car, the payments made toward your vehicle each month do not translate to ownership of the car at the end of the lease period. The only way you'll get to keep the car is if your agreement comes with a purchase option and you choose to buy the vehicle by exercising the purchase option.
Further, leasing a car comes with certain requirements car ownership does not impose. Staying at or below the mileage limit outlined in your lease agreement is one such limitation. If you exceed the allowable mileage, you may be charged excess mileage penalties at the end of the lease term.
How does a lease work?
Leasing a car involves signing a lease agreement, a document that outlines the terms and conditions of the leasing arrangement. This agreement should specify, among other things, the period of time you will keep the car, monthly payments you will make and mileage limits. Other fees and charges should be included in the agreement, like the disposition fee, acquisition fees, excess wear and use and other end-of-term charges, and termination fees that may apply if you end your lease early.
If your vehicle’s mileage at the end of the lease term exceeds the allowable limit, you may be subject to an excess mileage penalty. You should find information on maintenance and wear and use standards within the lease agreement.
The lease agreement should also outline your option to purchase the vehicle from the lessor if a purchase option is offered. Depending on your lease, at the end of the lease term you may have the option to return the vehicle, extend your lease, or buy the car.
The decision to purchase your leased vehicle may be influenced by how satisfied you are with the vehicle’s performance, your budget, and the purchase option price compared to the vehicle's market value. If the purchase option price is less than or equal to the market value, the purchase option may be a good deal.
How much does it cost to lease a car?
The cost of leasing a car varies depending on the type of car you are leasing and how long you lease it. Generally, the more expensive the vehicle and/or the shorter the lease period, the higher the monthly payment. On the other hand, a relatively inexpensive vehicle or longer lease period will generally mean lower monthly payments.
Instead of paying for the entire value of the car, your monthly payments cover the vehicle’s depreciation (plus rent and taxes) over the lease term. Since you’re only financing the depreciation instead of the purchase price, your payment will usually be much lower.
In summary
If you're in the market for a new vehicle, leasing a car may be an option to consider. Whether you're a first time buyer or just looking to upgrade your vehicle, leasing may be an option that gets you into your next car with less commitment than ownership.
