How Does Leasing a Car Work?

It’s vital to understand the nuances of a car lease before you make a deal. Sure, driving a new car, usually without an obligation to buy it, is one reason almost a third of new-car “sales” in recent years are leases. Some people erroneously liken auto leasing, terms of which generally range from three to five years, to apartment leasing. The basic concept is the same, but there are vital differences. Before you move ahead, consider these points to learn how auto leasing works.

Monthly Payments 

When you lease a car, its depreciation is factored into your total cost. In a lease, you’re paying the amount the car depreciates over the length of the lease (plus interest and other fees) rather than the whole price of the car. You can expect to pay less for a leased car than a financed car. Of course, you don’t own a leased car at the end of the term.

Related: Car Lease Calculator (Lease vs Buy)

Down Payment

When you lease a car, you generally pay a much lower down payment than if you finance one. That doesn’t mean you can’t make a larger down payment when you lease. Note: A high down payment is not a negative when you lease. It lowers your overall payment and safeguards you in case the car is totaled or stolen. If that were to happen, you’re obligated to pay the full value of the car.

Gap Insurance

You may need to carry more insurance coverage. You likely also want to ensure you have guaranteed asset protection insurance — if not included in the lease — in case the leased car is totaled or stolen. Again, if that happens, you’re obligated to pay the value of the car.

Maintenance and Repairs

New leased cars are covered by warranties, often for the length of the lease. Normal maintenance and repairs are generally not covered unless your car comes with a complimentary maintenance program from the factory (more common in luxury cars than non-luxury). And if you scratch the paint, stain the upholstery or crack a mirror, you are required to pay for that.

Mileage Restrictions

If you lease a car, you will likely be restricted to driving 10,000 to 15,000 miles (the average is 12,000 miles) annually. Every mile over may cost anywhere from 10 to 25 cents. Stories abound about drivers who leased cars, hit the mileage limit months before the lease ended and basically kept the car parked until the lease expired. There are leases that allow for high mileage, but costs are also higher. It’s better to ask about them, though, if you’re concerned about limiting your mileage.

Damage

As mentioned earlier, you can also be on the hook for damage to the leased car. That doesn’t just mean major scrapes — it also means dents, dings, stains, “curbed” wheels and more. Some lease owners have their cars detailed (or at least washed and waxed) before they return them; others pay third parties to repair damage. Of course, that can actually lead to more damage if the repair is not done properly in the opinion of the inspectors.

There are more ways to cut costs when leasing, such as bargaining on total payment, fees and more.

Learn how to save by familiarizing yourself with important auto lease terms, including:

  • Closed-end lease: The most common type, which does not require the lease to buy the car at the end of the term
  • Residual value: The worth of the car at the end of the lease
  • Single-payment lease: Just as you can pay cash to buy a car, you can pay the total lease amount and fees. The positive: You often pay less because the company gets its money up front.

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