Understand Car Leasing

what does it mean to lease a carCar Leasing — a form of new-car financing, similar to a loan. It is not renting, although it shares some of the same characteristics. It offers a brand new car under warranty every 2-4 years, relatively low monthly payments often with no down payment, less sales tax (in most states), and a convenient walk-away return at lease-end. Alternatively, the car can be purchased at lease-end for its remaining value.


Car Leasing – Briefly Explained

To lease a car means to make relatively low monthly payments (lower than loan payments) which only pays for the car’s normal depreciation, not its full value, as it would be if you purchased.

For a 3-year lease, monthly payments are about half of loan payments for the same car, same term — since you only pay for about half the car’s original value.

Since you don’t pay for the car’s full value, you can return it at the end of the lease, or purchase it for its remaining value. As such, you get credit for all payments that you’ve made.

You arrange a car lease with a new-car dealer. Only brand new cars are leased. You can lease any car you want.

Leases are based on negotiated prices. Negotiate your best price for lowest monthly payments. This price is called “capitalized cost” in a lease.

You can make a down payment, or not, to reduce your monthly payment amount. A down payment is called “capital cost reduction” in a lease. A down payment is not a deposit.

You may choose the term (length in months) of your lease, typically 24-48 months. It’s smart to lease for no longer than the manufacturer’s new-car warranty.

You may be able to choose your mileage allowance, typically 10,000 – 15,000 miles. Extra miles can be purchased at the beginning of a lease, usually at a lower rate.

Dealer’s don’t control the other important factors in a car lease:

  • Lease-end residual value (determined by the mileage allowance)
  • Money factor (finance rate)

At the end of your lease, you may be charged for any mileage overage, excessive wear and tear, and unrepaired damages.

You may also be charged a “disposition fee” if you return the car, and don’t purchase it.