Leasing is an alternative to financing that restricts mileage and ownership term, but offers a lower payment than financing. Leasing is not for everyone, as some people drive too many miles per year or prefer to own their cars outright. Learn if leasing makes sense for you based on your driving habits and lease requirements.
Leasing a vehicle allows you to drive a new vehicle every few years. Most leases run for a term of 36 or 39 months, which is usually the time the vehicle is under the manufacturer's bumper-to-bumper warranty. While you are responsible for maintaining the vehicle, you won't have to worry about expensive and unexpected repairs, as the warranty should cover any mechanical issues. You can also walk away from the lease at the end of the term, as the bank assumes future market values, so you don't have to worry about trading in or selling on your own. You pay for depreciation only, which results in a cheaper payment than financing, sometimes over $100 per month cheaper.
Leasing is ideal for those who drive 15,000 miles per year or less. You may have the option to choose a higher mileage, but if you do, the payments are very similar to financing. At the end of your term, you must have less than the mileage you chose at the beginning of your contract, as fees for going over that mileage can prove expensive. The lessor can charge anywhere from 10 to 18 cents per mile over your allowance. You must also maintain your car and repair it so it is in good condition before returning it. You cannot modify the leased vehicle while you have it; you cannot put stickers on the body of the car or remove or replace the radio. The bank owns the vehicle you lease, which is important to keep in mind while you drive it.
Most leases are advertised for up to 39 months and 15,000 miles per year. You can choose a term as low as 24 months or as high as 60 months, although doing so may not prove financially beneficial. The leases you see advertised are usually the cheapest option available, meaning any changes will raise the low, advertised payment. Advertised money down is not necessary. You must make your first payment to lease a car, but you don't have to pay taxes, fees or a down payment, although this will cause your payment to rise. Payments are cheaper than financing, and before you sign your contract, leasing offers some options and flexibility.
End of Term
You can purchase the vehicle at the end of your lease or walk away from it. Even if you have gone over your mileage or damaged the car, the amount you can buy the vehicle for at the end of the term is specified in your contract. This may prove sensible for some, especially as the risk of leasing includes lifestyle changes that cause you to go over the contracted mileage. You are not stuck paying over-mileage or excessive-wear-and-tear fees if you purchase the car. You can also use the vehicle as a down payment, as you can trade it in toward another vehicle if the buyout amount is in line with equity.
It makes sense to lease a vehicle during the time the car is under the manufacturer's bumper-to-bumper warranty; otherwise, you may find yourself shelling out a lot of cash for unexpected repairs. For example, if the DVD player breaks in the car, you are expected to fix it before you return the vehicle. If you are unsure if you can stay under 15,000 miles per year during the lease term and don't plan to buy the vehicle at the end, then leasing is probably not for you. While the lower monthly payment is attractive, fees at the end of the lease or from an adjusted lease term can cost you more than a traditional financing would, which defeats the purpose of leasing. Read the contract over fully before signing.
- Lease Guide: Who Should Lease?
- U.S. Bureau of Labor Statistics. "Prices & Spending." Chart 1. Accessed April 23, 2020.
- Board of Governors of the Federal Reserve System. "Keys to Vehicle Leasing: End of Term." Accessed April 18, 2020.
- Consumer Financial Protection Bureau. "What Should I Know About the Differences Between Leasing and Buying a Vehicle?" Accessed April 23, 2020.
- Board of Governors of the Federal Reserve System. "Keys to Vehicle Leasing: Mileage." Accessed April 18, 2020.
Shanan Miller covers automotive and insurance topics for various websites, blogs and dealerships. She has extensive automotive experience, including auction, insurance, finance, service and management positions. Miller has worked for dealer sales events around the United States and now stays local as a sales and leasing consultant for a dealership.