Leasing a Car: What You Need To Know
- Leasing a car is like having a long-term rental. You make monthly payments on your car and turn it in when your lease is up.
- Leasing makes sense if you like to have a new car every few years and want lower monthly payments. Avoid leasing if you rack up a lot of miles.
- Car leases come with lower monthly payments, but more fees. To get the best deal, ask for quotes — including fees — from a few dealerships before signing your lease.
How to lease a car
When you lease a car, you agree to make a monthly payment in exchange for the ability to drive the car for a specific number of months and miles. Here’s how it works.
1. Choose the car you want to lease
Typically, you’ll choose a new car at a dealership and then apply for your lease with the dealer.
But before you head to the dealership, research the car you want to lease. Use auto review sites like Edmunds and Kelley Blue Book to learn about each car’s features and capabilities to see if it fits your lifestyle.
2. Consider your budget
Take a look at your budget to decide how much you can afford for your monthly lease payments. Paying for your car lease isn’t just a matter of making monthly payments — you’ll likely need to budget for fees.
Hidden costs of leasing a car
You’ll agree to pay upfront and end-of-lease fees when you sign your lease agreement, which can include:
- Typical dealer fees like title and registration
- An acquisition fee for processing your lease paperwork
- A down payment
- The car’s residual value (a fee to make up for the car’s depreciation while you have the lease)
- Money factor (essentially the interest rate of your lease)
- First and last monthly payments, just like some landlords charge for apartment leases
- A disposition or return fee
- A fee for excessive wear and tear
- An early termination fee
Remember that even though you don’t own it, you’ll need to get car insurance for your leased car.
3. Compare multiple lease offers
To be sure you’re getting the best deal on your new lease, get several quotes from different dealers and ask for your offers to include an itemized list of fees. Do all of your lease shopping in a 14-day window to avoid the damage to your credit score that would come with multiple hard credit pulls.
You can ask the dealer about any special incentive leasing offers or other discounts available. Usually, the dealership’s own financial lender — for example, Hyundai Motor Finance or Ford Credit — will have competitive lease offers.
The best lease deals are reserved for those with good or excellent credit, while a lower credit score could prevent you from leasing completely. You can get your score for free with LendingTree Spring.
4. Test drive the car
Before you lease, take the car for a test drive to make sure it has the features you want and that you can live with it for the lease term.
The lease contract will be based on the specific vehicle — not just the price for that make of car — so the trim level, features and accessories will affect the final price.
5. Choose a lease and sign
To apply for a lease, you’ll be asked to provide basic personal information, like your Social Security number, employment status, income and monthly housing payment.
Don’t sign a lease agreement until you’ve read and understood all of its terms. Make sure the lease doesn’t include add-ons that you haven’t agreed on, like an extended service contract or disability life insurance.
Just like with a car loan, you can negotiate parts of your lease contract, including:
- Cost of the car
- Money factor (essentially the interest rate for your lease)
- Mileage limit
- Estimated value of the car at the end of the lease
- Down payment
- Value of your trade-in
- The option to buy the car after the lease
6. Decide what you want to do with the car
At the end of the lease, you can return the car to the dealer, buy it from the dealer with a car lease buyout or exchange it for another leased vehicle.
You can get out of a car lease early, but you’ll likely need to pay fees.
Leasing vs. buying a car
Leasing a car is like renting it for a set amount of time. Lease payments tend to be lower than with a typical car loan, and they usually last two to four years, with mileage limits of 10,000 to 15,000 miles per year.
Typical auto financing (such as a car 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 in whenever you wish.
Here are some quick stats on how car leases compare with new car loans:
Source: Experian’s State of the Automotive Finance Market Report Q4 2024
Pros and cons of leasing a car
Compare the total cost of leasing versus buying a car, along with these other factors, to see which option is right for you.
Pros
- Less money down: Most leases have a lower down payment compared to auto loans. Some dealers have zero-down leases, though you may need to pay fees at signing.
- Lower payments: The payments are usually lower than typical car payments.
- Convenience: When the lease is up, you can turn the car in and walk away. You won’t have the hassle of selling or trading it in.
Cons
- No equity: When you make typical car payments, you build ownership, or equity, in the car. A lease doesn’t build equity for trade-in or sale, so you can’t use your old car to help pay for a new one.
- More fees: Fees are due at the beginning and end of the lease. There’s also a fee if you end the lease early.
- Mileage restrictions: You’ll have to keep a close eye on your mileage or else pay expensive excess mileage charges (up to 30 cents or more per mile).
Types of car leases: Which should you get?
Closed-end and open-end leases
The most common type of lease is a closed-end lease. This means the leasing company estimates how much the car will be worth (its “residual value”) at the end of the lease. When the lease is over, you can usually return the car and walk away. If the car is worth more than the estimated value, you might even be able to buy out your lease for the lower, agreed-upon price.
An open-end lease is riskier. At the end of the lease, you have to pay the difference if the car’s actual value is less than the estimated value. However, if the car is worth more than expected, you could get some money back.
Subvented leases
A subvented lease is a kind of closed-end lease that includes discounts or incentives. You may be offered a lower interest rate for a smaller monthly payment. Or the leasing company will inflate the residual value of the vehicle, also leading to a lower monthly payment. Subvented leases are usually reserved for people with excellent credit.
Single-payment leases
In a single-payment lease, you pay all the monthly lease payments at the beginning of the term. You don’t have to make a payment each month, but you tie up your money instead of being able to use it for something else.
Used-car leases
You can typically get a lower monthly payment by leasing a used car because the car has already depreciated. Some manufacturers offer leases on certified pre-owned cars that have undergone thorough inspections and come with factory warranties.
Short-term vs. long-term leases
A short-term lease (a few months to two years) may be cheaper overall than a long-term one, but the payments will likely be higher because a new car depreciates quickly in the first year.
A long-term lease (two to five years) will help keep your monthly payments down, but you may end up paying the full value of the car, in which case a standard loan would have been a better option.
Can you lease a car with bad credit?
There’s no hard and fast credit score to lease a car — it varies from dealer to dealer. The best deals are reserved for those with good to excellent credit, starting at a score of 661.
Leasing usually requires better credit than an auto loan. The average credit score for leases is 752, according to the latest data from Experian. However, leases are available to people with a credit score of 600 or less.
Leasing a car with bad credit often means a higher monthly payment, because there’s a higher risk to the lender. Dealers may also require a larger down payment or shorter lease term.
Increase your chances by improving your credit score. This will also help you qualify for a lower interest rate or money factor rate. Also consider alternatives such as bad credit car loans.
Frequently asked questions
If you value driving new cars and don’t want to deal with the hassle of selling or trading in your car when you’re done driving it, leasing could be a good idea.
Remember that lease monthly payments aren’t the same as typical car loan payments — they don’t help you build equity, or ownership, in the car. Do a side-by-side comparison of the cost of leasing vs. borrowing for the same car to decide which option is better for you.
A three-year car lease typically comes with a total of 36,000 miles.
With a car lease, you can drive a car for a set amount of time and a certain number of miles before returning it to the dealership. You’ll pay monthly lease payments during this time. When you’re done, you can return the car, trade it for another car lease or buy the car from the dealer with a car lease buyout.
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