Leasing a car works like a long-term rental where you pay a fixed monthly fee to use a vehicle for an agreed period, typically two to four years, with a set annual mileage limit
. Here’s how it generally works:
- Upfront Payment: You usually pay an initial amount upfront, often called a down payment or drive-off fee, which is typically lower than a traditional car purchase deposit
- Monthly Payments: You make fixed monthly payments that cover the car’s depreciation during the lease term plus interest (called the money factor). These payments are usually lower than loan payments for buying a car
- Mileage Limits: Your lease contract sets a mileage allowance. If you exceed it, you pay extra fees per mile, so it’s important to estimate your driving needs beforehand
- Maintenance and Insurance: You are responsible for insurance and routine maintenance, but major repairs may be covered under warranty. Some leases include service packages, but this varies by contract
- End of Lease: At the end of the lease, you return the car to the leasing company or dealer. You can then lease another car or walk away. Some leases offer the option to buy the car at a predetermined price (residual value)
- Ownership: You never own the car during or after the lease unless you exercise a purchase option. The leasing company remains the legal owner
Advantages of Leasing:
- Lower upfront costs and monthly payments compared to buying
- You drive a new car every few years without worrying about depreciation
- Leasing can be simpler and more flexible if you prefer changing cars regularly
Considerations:
- You must stay within mileage limits or pay penalties
- You don’t build equity in the car since you don’t own it
- You may face fees for excessive wear and tear or early termination
In summary, leasing a car is like renting it long-term with monthly payments covering depreciation and use, allowing you to drive a new vehicle with lower upfront cost but without ownership at the end
