Whether you're in the market for your first vehicle or you're ready to trade in your old car for an upgrade, you might opt for leasing your next vehicle rather than buying it. When you get a car lease, you sign an agreement to use the vehicle for a number of years under certain terms – much like renting.
At the end of your car lease, you can simply hand over the car to the dealership or look into options to keep the vehicle if you'd like. If this option for getting a car appeals to you, read more to learn about how to get a lease, which benefits and considerations come with the decision and what requirements you need to know.
The Basics of Leasing a Car
You can think of a lease as a rental agreement – often for two to four years – between you and the lessor. Like with renting an apartment, you don't own the leased vehicle, so you need to agree to specific terms, and you usually put down a security deposit at the lease signing that serves as a security in case of damage or other fees.
While you're in the lease period, you make a monthly payment to the lessor that accounts for the expected residual value the car will have at the end of the term. Your payment covers things like depreciation, interest, the manufacturer's suggested price and various fees.
When you lease a car, the lessor or leasing company usually gives you an allowance in terms of the number of miles before you face extra fees at the end of the lease. During the lease, the dealership handles routine maintenance and most repairs that aren't your fault. However, you need to avoid anything beyond normal wear since this can mean losing your car's security deposit and even paying extra when the lease term is up.
There are also rules that you can't make modifications like you could with a car you own, so this can provide less flexibility for you but more security for the lessor.
During your lease period, you usually can trade the car in early as long as you pay an early termination fee. Otherwise, the lessor does an inspection when the lease term ends. They may charge fees for excess mileage and wear, and they should refund all or part of your deposit if terms are met. They'll also give you a few options to consider when deciding what you want to do with the vehicle. For example, you can hand over the car and do nothing else, do a trade-in for another leased car with a new term or agree to purchase the car for a buyout cost.
Read More: Can I Buy My Car Before the Lease Is Up?
Comparing Leasing and Buying
When comparing leasing a car versus buying, the biggest difference is that with buying, you're working toward ownership and being able to use the car and modify it as you'd like. You don't have to hand over your bought car at the end of a financing term, but you can trade it in for another model early if you'd like.
Leasing, on the other hand, offers flexibility if you don't want to commit to owning a vehicle and like the option to switch cars more frequently. Another advantage of leasing is that the maintenance and repairs are taken care of by the dealership rather than out of your pocket.
There are also differences between these options in where your payments go each month. When you're leasing, you're essentially paying for the depreciation that the car experiences during the term alongside taxes, interest and fees.
Your finance payments for buying a car would also include interest, fees and taxes, but they tend to be larger since you're responsible for the complete agreed sales price rather than an amount based on depreciation. However, when you own a car, depreciation drops its value.
Reasons to Lease a Car
Take a look at some benefits that can show why leasing a car may appeal more than buying, depending on your situation and preferences:
- Less cash up front: When buying a car, it's easy to pay thousands of dollars for your down payment alongside other costs such as taxes and registration. You usually don't need a down payment when leasing, unless it's required due to poor credit. Instead, you can expect to pay less money up front in the form of a potential security deposit, the first month's lease payment and fees to set up the lease and register the vehicle. This can make leasing more accessible to you.
- Warranty during lease: While owned cars usually have a warranty for a few years as long as they're new, you can expect the dealership to offer this benefit throughout your whole lease term. This saves you money in terms of repair and maintenance costs.
- Lower monthly payments: Since a major determinant of your car lease payment is accounting for depreciation, you can expect lease payments to be lower than financing payments for a purchased car. This means you can afford to lease a fancier car with the latest features when buying the same vehicle would be more financially challenging.
- No impact from depreciation: A common complaint about buying a car is seeing the worth decrease significantly, especially during the first few years, and this can be discouraging when you paid a large sum on a new car. When you lease, the vehicle isn't yours, so you don't have to worry about the car losing value because you'll just turn it back in to the dealership.
- Flexibility in switching cars: When you want to switch out a car that you've purchased, you have to deal with paying off the existing loan and taking whatever the buyer offers you. However, it's simpler when you lease since you can easily change vehicles at the end. You can even change to another car in the middle of a lease as long as you're willing to pay the lease's early termination fee.
Read More: Returning a Leased Car Before the Lease Ends
Downsides of Leasing a Car
Before signing those lease papers at the dealership, keep in mind these disadvantages that go along with leasing a car:
- Mileage limits: With mileage limits often ranging from 10,000 to 15,000 miles a year, leasing might be less appealing for frequent drivers since you can expect excessive mileage fees when you go over.
- Good credit score needed: While you could find a dealership that offers vehicle financing to people with poor credit, you usually need to have a good credit score in the upper 600s or 700s to have a chance of qualifying for a lease. Your credit score will end up impacting your lease payment due to interest as well.
- Payments not toward ownership: With a lease, the money doesn't go directly toward owning the car, even though you could pay a buyout fee at the end to purchase the car. Keep in mind this tends to be more expensive than buying the car in the first place. And if you don't end up buying the car the car in the end, you probably won't get much cash back except your security deposit.
- Less freedom: Whether you want to customize the car or move to another location, your lease contract can limit your freedom with the vehicle. You also often have to visit specific repair shops to get your car fixed and keep the car in great condition to avoid surprise costs when the lease ends.
- Extra costs: Since leased cars usually require gap insurance, you can expect higher car insurance costs alongside other fees for things like extra mileage, excessive wear and tear and early termination.
Understanding Car Lease Requirements
If you've decided to move forward with leasing a car, you should check that you can satisfy the requirements of the dealership or bank.
Your credit history and score come into play. A credit score in the 700s or higher with no recent bankruptcy or late payments will help you qualify. While you could lease with a lower score, this can mean higher interest rates and a less affordable payment. You also need to show a steady income and not have such a high debt-to-income ratio that the lease payment won't be affordable. If your income falls short, you might need to opt for a cheaper vehicle that fits the lessor's requirements.
You need to be prepared with some documentation similar to what you'd need for a car loan application. This means you should bring your driver's license, proof of income (such as a paystub) and a document showing your residency. You also need proof of insurance before you can drive the leased car off the lot, so bring your current insurance card and contact info so you can call and have the insurance switched over at the dealership. Lastly, bring a blank check for your initial signing costs.
Looking for a Lease
To find an ideal vehicle and get a good deal, you need to do some research to find a dealership and vehicle that fit your budget and needs. You can start searching on the websites of local dealers and car manufacturers to see any leasing specials they offer. Once you find something that interests you, it's worth doing some more research on the car to make sure it will retain its value and lead to a lower lease payment for you. Be sure to compare features carefully.
You can then submit some quotes to dealerships online and carefully analyze the upfront costs and monthly payment amounts. If you've decided to trade in an old car to the dealership, be sure to let them know, since that can impact your lease payment. It can help to call the dealership or visit and speak to someone to further negotiate the deal.
Once you've chosen a car and dealership and negotiated an acceptable lease payment, you can respond to the dealer. They might arrange an appointment for you to come see the vehicle, do a test drive and sign the leasing documents. Some dealerships may even come to your home with the car for your convenience.
Completing the Car Lease Application
Once you've met with the lessor and have gotten qualified based on the financial documents and income information you've reported, you need to review and sign the lease agreement to proceed. This document shows important information such as upfront charges, your monthly lease payment amount and date (along with a breakdown of the payment components), your annual mileage limits and the cost to buy the car at the end of the lease. The lease agreement also contains other details like late fee amounts and early termination fees.
Along with signing the lease agreement, you need to pay the upfront costs, show proof of insurance and complete other related paperwork for the car's registration and gap insurance coverage. After you've satisfied the dealership's requirements and paid all necessary costs and properly insured the vehicle, you can start using your new car.
Managing Your Car Lease
Missing your lease payments can impact your credit score much like missing a car payment can, so it's important to make your payments on time to avoid credit damage and late fees. Be sure to follow your lease terms closely. Avoid making modifications that aren't allowed and take good care of the car to ensure you can get your security deposit back at the end of the lease. Along with avoiding damage to the car, keep up with routine maintenance like oil changes since not doing so can also lead to charges when you return the car.
A few months before your lease ends, start thinking about your future plans for the vehicle and keep in mind the buyout cost and all the options available to you. If you've enjoyed using the car, you might decide to buy it, especially if you're otherwise facing a lot of fees for things like excessive mileage or cosmetic damage. On the other hand, you might find buying or leasing a new car in your budget and opt to just turn in the old car and pay any fees.
You can expect to take the car back to the dealership upon lease expiration, and they perform an inspection that determines the vehicle's condition and any extra fees. If you opt to turn the vehicle in, make sure you've removed all your personal possessions and thoroughly cleaned the car so that it looks its best. You can expect to fill out more paperwork at this visit too.
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- Wilmar: Essential Business Car Lease Requirements
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Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.