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Published: May 03, 2023 14 min read
Woman looking at a car for lease
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Many people enjoy the look and feel of a new car, but with the recent price surge, purchasing a new vehicle may not be the ideal choice for everyone. The average cost of a new car in 2023 hit a record high price of $50,000 — a hefty price tag and significant financial investment. Fortunately, there is another way to get a new ride without the long-term commitment required to finance a vehicle: the car lease.

What is a car lease?

In basic terms, a car lease is similar to a long-term rental. It’s an agreement between the company that owns the car and the person who wants to rent the car for the next few years. Leases can be a good option if one or both of the following appeal to you:

  • You want to switch vehicles every couple of years.
  • You prefer to avoid dealing with the expensive repairs that can come with owning a vehicle for an extended time.

How leasing a car works

Unlike when you purchase a new car, if you lease, you don’t own the vehicle. Once your application is approved and you select the vehicle you want to lease, you’ll sign a contract with a dealer to rent the car for a specific term — typically 24 or 36 months. At the end of the that time, you must either return the car or purchase it.

It's important to note that car leases often dictate how many miles you can drive during your lease term. If you exceed the mileage limit, you may have to pay additional fees when you return the car. You may also incur fees if you terminate your lease before the end of the agreement.

As with buying a car, the cost to lease a vehicle includes fees for documentation, tag, title, registration and licensing. In addition, leases may require the following up-front costs:

  • A down payment
  • A refundable security deposit
  • Your first month's payment
  • Sales tax and other fees

Pros and Cons of leasing a car

Although leasing gives you the flexibility to change cars every few years and avoid costly repairs, leasing a car — like any financial decision — has advantages and disadvantages.

  • Ability to upgrade vehicles frequently
  • Many new leased cars have maintenance covered for the lease's duration
  • May have lower monthly payments than car loansĀ 
  • May include GAP insurance
  • Excess wear and use limitationsĀ 
  • Less ability to customize or personalize your car
  • You don't build equity

How to lease a car in 8 steps

1. Research cars

Like a traditional car purchase, take the time to research the car you want to lease. Consider its look, space needs, gas mileage and add-ons such as sound systems, heated seats and safety features. Leasing a car that fails to meet your needs means you may end up paying additional fees to end your lease agreement early and change models.

2. Use a leasing calculator to estimate monthly payments

Before signing a contract, be prepared for how much your monthly payments will be. To figure this out, use a reliable car lease calculator. You'll need to input the cost of the car, the lease term you're considering, the interest rate and the amount of your down payment. While estimating your monthly payments, you may want to obtain quotes from the best car insurance companies to find the best insurance rates for car leasing.

3. Visit car dealerships

When it's time to start shopping in person, visit a car dealership. You'll learn what's available and confirm your lease cost calculation is correct. Visit multiple dealerships and shop around for the best deals.

4. Test drive a variety of cars

Even though you aren't making a long-term investment to purchase a vehicle, you still want to love your car. Be sure to test drive several cars, even if your sights are set on one model. It could be the right car wasn't even on your radar.

5. Decide on a lease type

Depending on your specific needs, you can choose from several types of car leases.

Open-end lease

An open-end lease requires the lessee to pay the difference between the vehicle's original value and its residual value (or what the car is worth after it’s fully depreciated) when the lease term ends. In rare cases, the car's value at the end of the lease is higher than the original value. This means you can purchase the car and make a profit if you resell it. Open-end leases are risky since you don't know how much the car will appreciate or depreciate by the end of your lease.

Closed-end lease

Close-end leases are by far the most common leases but are more restrictive than the open-end variety. Unlike an open-end lease, a close-end lease does not require the lessee to pay the difference in market value at the end of the term. However, you're still responsible for the vehicle's condition upon return and may have to pay for dents and dings accrued along the way.

One-pay lease

A one-pay lease, or single-payment lease, is an agreement where you can pay the fees and monthly payments in full at the beginning of your lease agreement. These types of leases are rare, as most consumers cannot afford to pay that much up front, but it's a good option for someone who can buy a car for cash but wants to change vehicles every couple of years.

Used lease

Leases are typically for new cars, but leasing a used car is also a viable option, especially if you're on a particularly tight budget. Doing so comes with its own benefits and drawbacks, so always carefully research any used car before officially signing anything.

6. Consider your offers

After shopping around and visiting several dealerships, it's time to consider your offers carefully. To decide what offer is best for you, determine what you're willing to pay upfront and what monthly payment you can afford. Then, ask each salesperson for a breakdown of the deal, including all required fees and taxes. This will allow you to more accurately compare the offers you have received.

7. Negotiate a better deal

It’s a truism that a dealer's first offer is always flexible, so be ready to bring your negotiating skills to the table. After comparing your offers, discuss the price and terms of your lease agreement before signing. For example, you can negotiate various components of the lease such as the buyout price or mileage allowance. It's rarely in your best interest to settle for the very first offer you receive.

Dealerships are incentivized to make the sale, even if it's at a lower price than their original offering. Don't hesitate to get quotes from multiple dealerships, then pit them against each other in a bidding war to see how low of a deal you can get.

8. Close out the deal

Once you're happy with the terms of your lease agreement, you can officially close the deal. At this point, you can sign the lease agreement, pay the down payment and fees and drive your new ride off the lot!

Car Leasing vs. Car Financing

The choice between leasing or buying a car can sometimes be difficult. Whether you lease or finance your car, you will have to make monthly payments regardless.

As stated previously, with a car lease, you’re paying to borrow or use the car for an extended period of time. Your monthly payments will be lower because you won't own the car at the end of your lease term. Essentially, you’re paying for the expected wear and tear of the vehicle as you drive it, and at the end of the lease term, you'll have the option to return the car or buy it.

When you finance a car, however, you are paying to own the car. You apply for a loan with a bank or other lending institution and make monthly payments for 24 to 72 or even 84 months. Part of each payment goes toward the interest on the loan, and the rest is used to pay down the principal. The higher your interest rate, the higher your monthly payment. As you repay the loan, you build equity, and at the end of the loan, you’ll own the car. When looking into financing a car, be sure to look into the best car loan rates.

Buying a car outright isn't easy these days. It's hard to find well-made new cars under $25,000, so all but the most economical options may be out of your price range depending on your income.

Whether you decide to lease or finance your next car, you'll want to review your credit score. There are several different ways to check your credit score, and it's a good practice to check your credit report annually to ensure the information is accurate.

While it's possible to buy or lease a car with bad credit, it's not ideal since your interest rate will be higher, making your total monthly payment higher. A credit score of 660 or higher is a great credit score to lease a car because you'll have great approval odds. Many buyers fall in the 620-659 credit score range, and there are plenty of borrowing options available there, too. To understand your odds, you can try to get preapproved for a car loan.

What happens if you break a car lease?

If your situation changes partway through your lease, it may be necessary to break it. By returning the car to the dealership, you will terminate your lease agreement and be required to comply with the early termination options written into the lease agreement. This means you'll probably have to pay early termination fees. However, you can sometimes end your lease early without any fees, but you'll likely be responsible for the remainder of the monthly payments.

Another option is to transfer your lease. Not every car leasing company allows lease transfers, but if yours does, a transfer can be a much more affordable way to get out of your lease. In these cases, you can transfer a lease to a friend, family member or private buyer.

Mistakes to avoid when leasing a car

Here are a few common mistakes to avoid when leasing a car:

  • Not negotiating the lease term: Various items in a lease agreement are negotiable. For example, you can negotiate the buyout price, fees and mileage allowance to ensure the lease term best meets your needs.
  • Underestimating the amount you drive: The quickest way to rack up extra fees on a lease is to drive it over the allowed mileage. Accurately plan and calculate the miles you'll drive during the lease term.
  • Failing to maintain the car: If you return your car at the end of the lease with additional damage above and beyond expected wear and tear, you'll be charged to cover the repairs. Be sure to clarify the definition of normal wear and tear prior to signing the lease agreement.
  • Forgetting to increase liability insurance: Most leasing companies require liability coverage that may be higher than what your current car insurance policy includes. Always clarify how much liability coverage is needed and upgrade your policy accordingly.

Is leasing a good idea?

Leasing a car can be a great option if you need to lower your monthly payments or want the flexibility to change or upgrade cars every few years. On the other hand, if you drive more than the average of 12,000 miles per year, a car lease may not be your best option, because of the use and mileage limitations commonly involved in leases.

There are other options if you aren't sure about buying or leasing. Car subscription services allow drivers to access new cars without the hassle of owning or leasing. Customers receive a vehicle in exchange for a monthly fee. Before car subscription companies, anyone who didn't want to lease or finance a car had to rent a car by the week or month. While you can still find car rental deals, it's generally a much more expensive way to access a car regularly.

Thankfully, multiple options in today's marketplace can get you on the road. Leasing, financing, car subscriptions and renting cars each have their advantages. Knowing the best option for you really depends on how much you'll be driving, how long you need the car and what you're willing to spend.

Knowing the ins and outs of leasing a car is critical to understanding if it's a good idea for you. Research some cars you like online and visit your local dealerships to see what leasing options are available.