If you’re asking yourself, “How does leasing a car work?”, you’ve come to the right place! In this post we’re exploring the car leasing process and what you need to know to make the best decision when it comes to leasing or buying a car.

Leasing a car allows you to use a car for a specific time frame with a set amount of mileage, at which point you can either buy the vehicle or return it. Whether you choose to lease because it offers you a lower monthly payment or have decided you are not ready to commit to a certain vehicle long-term, understanding how the lease process works will assist you in your final decision.

5 Things to Know About How Car Leasing

Coins stack in columns on saving book and car on finance concept

Understand the Car Leasing Process

When you lease a car, instead of paying the full price of the car, you will pay the difference between the agreed-upon price and the value it is expected to retain at the end of the lease term. This difference will be determined by the length of the lease as well as the allotted mileage. 

For example, if you choose a vehicle valued at $36,000 new and $22,000 after four years and 48,000 miles, the monthly payment will be the depreciated value of $14,000, less any money you put down over 48 months. Fees, interest, and sales tax on the monthly payment will be added to the monthly total as well. 

Once the term of your lease has concluded, you will have the option of returning the vehicle or obtaining a loan to buy the car. You can also pay cash to buy the car at the end of the lease. If you choose to purchase, you will be responsible for paying the agreed-upon price listed as the lease-end value.

If you decide to end the lease, you will be contacted to have your vehicle inspected and they will record the mileage and inspect the vehicle. If the miles are over the agreed-upon amount, you will be charged a cost per mile, which will be listed in your contract. They also may charge you for any interior or exterior damage that is considered excessive wear and tear for the age of the vehicle. You then simply return the car

One important distinction between leasing and buying is that if you lease a vehicle, you will have no ownership interest in the vehicle. The leasing company will retain the title unless you decide to purchase the vehicle at the end. While you can sell a vehicle at any time if you purchase one, breaking a lease can be difficult and sometimes results in having to buy out the term of the lease. 

Man with calculator researching how does leasing a car work

Setting Expectations in Your Lease Contract

It is important to understand the particulars of your lease contract so that you will know exactly what issues can lead to additional charges and how the vehicle will be valued. If anything on your contract is unclear, your auto broker can help you understand the various terms and how they will affect the overall cost of the lease. A lease agreement will include:

    • Lease Acquisition Fee: This is a fee that is added to your lease by the leasing company. The leasing company charges this fee to cover costs setting up the lease. 
    • Gross capitalized cost: The agreed-upon value of the vehicle and any items you pay over the Lease term.
    • Capitalized cost reduction: The amount of any net trade-in allowance, rebate, noncash credit, or cash you pay that reduces the gross capitalized cost.
    • Adjusted capitalized cost: The amount used in calculating your base scheduled payment.
    • Residual Value: The value of the vehicle at the end of the lease used in calculating your base scheduled payment.
    • Depreciation and any amortized: The amount charged for the Vehicle’s decline in value through normal use and for other items paid over the Lease term. 
    • Rent Charge: The amount charged in addition to the depreciation and any amortized amounts.
    • Total of base scheduled payments: The depreciation and any amortized amounts plus the rent charge. 
    • Lease Payments: The number of payments in your lease.
    • Excessive Wear and Use: You may be charged for excessive wear based on standards for normal use and mileage overages. Low mileage leases can be as low as 10,000 miles, and high mileage leases can go up to 15,000 miles. It is important to note that if you go past the number of miles on the factory warranty, you may be responsible for repairs at that point even if it is leased. 
    • Purchase Option at End of Lease Term: You have an option to purchase the vehicle at the end of the lease term for a fixed amount plus a purchase option fee which may or may not be included. The purchase option price does not include official fees such as those for taxes, tags, licenses, and registration. 
    • Other Important Terms: See your lease document for additional information on early termination, purchase options, maintenance responsibilities, warranties, late and default charges, gap insurance, and any security interest, if applicable. 

Understanding the Money Factor

The interest rate paid on a lease payment is referred to as the money factor and differs from a traditional car loan interest rate. You can convert the money factor on your lease agreement to a more comparable interest rate by multiplying it by 2400. If, on your lease agreement, you see a money factor of 0.002, you will be paying a comparable interest rate of 4.8%.

Close-End Lease vs. Open-End Lease.

With most leasing companies, the lease will be close-end which means that the vehicle’s value will be fixed at the residual value. Once the term of the lease has been met, and the car is returned in satisfactory condition, the lessee will be able to walk away at the end of the contract without paying more. 

If the car lease was created as an open-end lease, the lessee would be responsible for any extra amount if the market value is lower than the lease’s residual value. This will be part of the lease-end costs. 

Consumers will often choose closed-end leases, which will give them predictable monthly payments and no additional costs as long as terms have been satisfied. Open-end leases are usually used by businesses that may require more flexible terms and cannot stay within mileage limits. 

Auto broker handing over the keys to a customer who just leased a car

Benefits of Car Leasing Over Buying

Many consumers are drawn to the appeal of leasing, which can, in fact, offer many benefits over purchasing a car. One of the most common reasons to consider a lease is the lower monthly payment. By paying for only the depreciated value of the vehicle and the sales tax on that amount, your monthly payments will be much less. It is important to note though, that you will need a good credit score to qualify for a lease. 

Another benefit of choosing a lease is that it often comes with a smaller down payment. Depending on the car’s expected depreciated value and the amount of the monthly payment, you could be required to put significantly less down than with a car loan. 

Drivers who enjoy the latest in technology and vehicle features will enjoy the added benefit of getting a new car every three to four years by choosing a lease option. By leasing, you will be able to drive a later model car all the time and be able to enjoy all the cool new features.

Finally, many people choose to lease since they will have a vehicle covered under the manufacturer’s warranty for most, if not all, of the time that the vehicle is being used. This can save a lot annually on the cost of repairs. 

Lease a Car With an Auto Broker

If leasing sounds like the right option for your next vehicle, or you are still on the fence and need more information, an auto broker is the best way to help you find your answers and what vehicle you are ultimately looking for. At AutoSearch, our brokers will walk you through the ins and outs of the lease process and help you secure the right vehicle for your needs and personal finance situation.