How does leasing a car work?

Leasing a car is similar to a long-term rental. You’ll generally have to make an upfront payment, plus monthly payments, and get to use a car for several years. At the end of the lease, you’ll return the vehicle and have to decide if you want to start a new lease, purchase a car or go carless.

When you lease a vehicle, your monthly payment will be calculated based on the vehicle’s depreciation—the change between its current value and its value at the end of the lease—plus interest and fees.

Your lease agreement covers the following:

• How much you have to pay at the start of your lease.
• The lease’s length—typically a lease lasts for two to four years.
• How much the car is currently worth and how much it’s expected to be worth at the end of the lease.
• The fees you’ll have to pay at the end of the lease.
• The “money factor” or rent charge, which is similar to an interest rate on an auto loan.
• Possible termination fees if you want to return the car before the lease ends.
• How many kilometers you’re allowed to drive each year. You may be required to pay a per-mile fee if you go over the limit.
• How the lessor defines normal wear and tear and how much you’ll have to pay if there’s excessive wear and tear. If you smoke in the car, have kids, transport pets or park on a busy street, you increase the chances of fee-inducing incidents.
• What happens if you miss a lease payment.

Some of the rules may seem restrictive, but remember, you don’t own the vehicle. The lessor keeps the title, and you have to return the car in good condition at the end.

What Are the Benefits of Leasing a Vehicle?

Leasing a car may be more appealing than buying for several reasons:

• Assuming you’re comparing leasing versus financing a purchase of the same car, the lease payments will generally be lower than the monthly loan payments.
• A lease may require a smaller down payment than purchasing a car with a loan.
• You may be able to afford a brand new car, complete with the latest bells and whistles, even if you couldn’t afford to purchase the same car.
• If you want to always drive the latest-model cars, leasing could be less expensive than buying and selling a vehicle every couple of years.
• Your car will generally be covered by a manufacturer’s warranty.
• You don’t need to worry about selling or trading in the vehicle at the end of the lease.

What Are the Disadvantages of Car Leasing?

Leasing a car isn’t for everyone, nor is it always a great idea:

• In the long run, leasing will cost more than buying and holding on to a vehicle.
• You’re paying for the depreciation at the beginning the car’s life, when it depreciates the most.
• There are many potential fees and penalties.
• If you don’t need a car anymore, getting out of a lease can be expensive. And you might not be allowed to take the car with you if you move to a different state.
• You can’t customize the look or features of your car during the lease unless you pay hefty penalties at the end.
• You won’t have a car once your lease ends.