How Does a Car Lease Work?

Leasing a car is an alternative to the traditional purchase. When you lease a car, you don't own the vehicle. Instead, you pay the dealer monthly installments just as you would pay rent on an apartment. At the end of the lease term, you have a choice to purchase the vehicle or return it to the dealership.

Monthly payments on a lease are similar to payments on a car loan. Lease agreements spell out how many miles you can drive the car each year without incurring additional fees, the purchase price at the end of the term, and any penalties for poor maintenance or damage to the vehicle. Leases require an upfront drive-off fee, which is usually at least $1,000.

A lease makes the most sense for people who tend to own cars for brief periods. You don't suffer as much from the fast depreciation most cars experience in the first few years of ownership. A lease often costs more in the long run, which makes it less sensible for people who tend to own vehicles for a long time. Leasing companies usually require that you purchase gap insurance, which is an additional upfront expense of several hundred dollars in premiums, but this protects you if the leased vehicle is stolen or damaged in an accident.