Guide

The Ultimate Guide To Car Leasing

Everything you need to know about leasing a vehicle.


What is Car Leasing?


The simplest way to describe leasing a car is to say it’s like renting a vehicle. However, this simple description can be very misleading. In reality, leasing a vehicle is a flexible and innovative mode of vehicle ownership. Unlike a traditional car loan where you pay the entire price of the vehicle, leasing a car only requires you to pay for the portion of the vehicle you use — along with financing costs.

With a lease, you’re allotted a certain number of miles based on your driving habits. You make monthly payments throughout the agreed-upon term of the lease — 24 months, 36 months, 46 months, etc. When the lease ends, you’ll have the option to return the vehicle or purchase the vehicle at a predetermined residual value.

What is the Process?


There are a couple different factors when it comes to leasing a vehicle. First, we need to figure out how many miles we drive a  year. This is a key factor in leasing a vehicle. If you drive say ten thousand miles a year, you would not purchase twelve thousand miles a year unless you want a buffer.

On the other hand, you also do not want to purchase less mileage than what you would drive just for the simple fact that there will be an overage charge if you go over your miles. This charge per mile over the allotted amount is already predetermined when you sign your contract, so pay attention. The average person drives anywhere from twelve to fifteen thousand miles a year.

Next, we need to figure out how long we want to lease the vehicle. Most manufacturers have a 24-, 36-, 39- and 48-month lease. Mileage and time determine what the residual value is for the vehicle. Generally speaking, the 36 and 39-month lease will offer the best residual value.

The residual value is what the manufacturer thinks the vehicle will be worth at the end of the lease. This is nice because you only pay for what you use and not the entire amount of the vehicle.

All manufactures run different programs for leasing. Some vehicles will actually lease better than others because they hold their initial value better. Just because a car has a cheaper price may not always mean it is a better lease deal.  

Leasing also gives you flexibility. If you like to trade out of your vehicles every three years or you like to keep up with the new technology then leasing is probably right for you. And if you fall in love with your vehicle over the amount of time you chose to lease, good news: you can still purchase the remaining balance of the lease at the end.

Remember you only pay for what you use, not the entire vehicle price, taxes, or depreciation.

Tips for Leasing a Car From a Dealership

It’s possible to go to a dealership and get exactly what you want. It may not happen the first time you go, however.

Here are some other good things to keep in mind when leasing from a dealership:

  • Read your reviews before going to a dealership, doing so will save you a lot of headache and less of a bad taste in your mouth about the auto industry.
  • Do your research about the value of the car you’re interested in before going in.
  • Include in that research the potential residual value of the car after the lease term. That means figuring out how much the car will likely be worth after 2 years so that you can better negotiate the estimated depreciation, which can give you a better price.
  • Know your credit score and what you qualify for.
  • Don’t pay too much up front (ideally nothing over $2000). In fact, sometimes you can get away with paying nothing up front. If anything happens in the first few months of the lease, all that up front money will be for nothing. Save the money for the monthly lease payments.
  • Research gap insurance to avoid owing more than the car is worth.
  • Really think about how many miles you’ll drive.
  • Find out exactly what “normal wear and tear” is so that you can return the car and not owe more money.
  • Don’t lease for too long. Two to three years is ideal. After that, the warranty is over and you may be paying for some expensive maintenance.

A Couple of Good Programs to Look At

Be smart. Do your research. Everybody has heard of Costco or Truecar; dealerships sign up with companies like this to draw in more business. The nice thing about it is that it creates a set price which is substantially lower than the industry average.

If you use one of these two programs at participating dealerships, it is literally the lowest price you can get, unless you work for the manufacturer directly.

The problem is that not all dealerships participate in the Costco or Truecar programs. The last thing you want to do is go to a dealership that does not participate and argue with them that you are a Costco member or you saw a price on Truecar. They will not honor their pricing if they do not participate.

All participating dealerships will have it posted on their website more times than not. Costco even has their own specific pricing sheet.

Lease a Car Online


Car leasing websites allow you to lease the car of your dreams without negotiating prices inside a dealership. It’s not only more convenient to lease a car online, it also gives you the chance to take advantage of car lease special offers that are exclusive to car leasing websites.

At Carlease.com, we leverage our lease volume to offer customers exceptional prices on new leased vehicles. In addition, we don’t require a downpayment to lease a car online. Instead, we can spread the down payment across the lease term so you don’t have to worry about putting down a large chunk of money up front.

Car leasing websites also allow you to browse a wide selection of vehicles to gather information and narrow down your search. This is a great way to shop around if you’re unsure which specific make and model you’re looking to lease, or if you’re shopping on a budget.

If you feel like your budget is limited by bad credit, there are plenty of ways to prove you can make the monthly payments and put yourself in a better position to lease a car online. In general, these are the factors that will most significantly impact your ability to lease a car online:

  • Income
  • Debt-to-income ratio
  • Vehicle lease history
  • Down payment potential
  • Security deposit payments

We look at each of those factors in depth in our blog post about how to lease a car online with bad credit.

Speaking of budgets, one of the biggest misconceptions about leasing a car is that it’s more expensive than financing a car. This is simply not true, and there are several car lease calculators online that you can use to compare the costs of leasing versus financing a vehicle.

Some of the more popular car lease calculators include:

These tools are helpful not only for comparing costs; they are also great for finding car lease special offers that you otherwise may not know about.

Once you’re ready to commit to a lease, getting behind the wheel of a brand new car is a simple four-step process at Carlease.com:

  1. Browse our Showroom - our partnerships and integrations allow you to quickly browse and price nearly any vehicle to build your perfect lease. We'll help you choose from thousands of styles.
  2. Get Lease Options - simply fill out a short form and our leasing specialists get to work finding the best of the options available nearby. We crunch the numbers and find you the best deals.
  3. Complete Your Lease - review available options with your specialist by phone or chat and decide what best fits your needs and budget. E-sign the docs and schedule delivery.
  4. Enjoy Your First Drive - meet your new car at delivery to your home or office to make sure everything looks good. Remove personal items from the car you're trading in and enjoy your car!

If you’re unsure about leasing a car online, see what others have to say about their experiences by checking out Carlease.com reviews on Google, Facebook and Yelp.

If you have specific questions about car leasing websites or leasing a car online, head to our FAQs page, where you’ll find detailed answers to some the most common car leasing questions.

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How Car Lease Payments Work


Just as with any vehicle, your leased car depreciates in value as you accumulate more miles and the vehicle experiences normal wear and tear. To account for the loss in value, your leasing company requires a portion of your monthly payment to be directed towards depreciation.

Ultimately, your monthly payment will be largely based on:

  • The capitalization cost
  • The residual value
  • A money factor in place of an interest rate

The Capitalization Cost

When you purchase a vehicle, you will pay the sticker price or purchase price of the vehicle over a set number of years. However, leases have a capitalization cost representing the value of the vehicle at the beginning of the lease in addition to any extra fees, taxes, etc.

Similar to the sticker price or purchase price of a financed vehicle, the capitalization cost is the amount you’ll pay for the use of the leased vehicle. Generally, the lower the capitalization cost of your lease vehicle, the lower your monthly payments.

The Residual Value

The residual value of your lease is a fancy way of explaining how much the leasing company expects the vehicle to be worth at the end of the lease. Your residual value is based on the number of miles you agree to drive each year — such as 10,000, 12,000, or 15,000 — and the term of the lease.

At the end of your lease, you’ll have the option to buy the vehicle at the residual value — regardless of what the vehicle is valued on the open market at the time. This simple lease-to-buy option means you’ll know the resale value of your vehicle from the beginning and can potentially purchase a vehicle below market value or simply walk away.

It’s important to understand the higher your residual value, the lower your monthly payments. For this very reason, a growing number of people are choosing to lease a car — instead of purchasing the same vehicle and paying much more.

The Money Factor

The other component determining your lease payment is the money factor. While traditional vehicle financing includes an interest rate representing the risk the lender takes for loaning you money to purchase the vehicle; leases include a money factor, which is not the same as an interest rate.

The lease money factor represents the compensation you pay to the leasing company for the risk they take by trusting you’ll make all lease payments on time. Money factors are not expressed in annual percentage rates (APR). In contrast, money factors are written as long decimals. Although it may seem confusing, converting your money factor into APR is simple — just multiply the money factor by 2,400.

Maintenance


When you’re in a lease, odds are you’re not going to have the car long enough to need any major work done that isn’t covered by warranty. But the average cost of keeping a car roadworthy in its fourth through sixth years could easily be another $1,000 – more or less depending on the make and model.

And when your leased vehicle needs repairs, your costs are exponentially lower because the vehicle remains under the factory warranty. While purchasing a vehicle means you’ll pay taxes on the entire purchase price, you’ll only pay taxes on the portion of the vehicle you use with an auto lease, which means lower taxation. At the end of the term, you don’t have to worry about selling the vehicle or trade-in hassles.

But, one cost that accrues to lessees that car owners don’t have to concern themselves with is mileage above restriction. If your lease agreement specifies 12,000 miles per year and you drove an average of 15,000 and the per-mile penalty is 25 cents, then you’re in for a $2,250 settlement at the end of three years.

A key benefit of ownership is residual value. There’s a middle ground between I’m-in-a-new-ride-every-three-years and I’m-driving-this-tin-can-until-the-wheels-fall-off. So let’s say that the savvy owner keeps good care of her wheels and decides six years hence that she wants a refresh. She can trade it in for what the dealership calls its residual value. She could sell it on Craig’s List for its true residual value in cash.

End of Contract

(Wear and Tear Guide)


During the leasing process, there will be fine print about the state in which you need to return the car at the end of the lease. Respect those fine print details and/or negotiate the precise details. Little scratches from your bangles on your wrists? A few lunch stains on the seats? Who pays for that? Is that normal wear and tear? Find out! If you don’t, you may be in for a horrible surprise, which leads to the next mistake.

After you’ve established and negotiated the fine print, make sure to keep up with it. It’s easy to have a car for two years and let a few things lax, but that will cost you in the end. The dealer may not explain just how expensive it is when there are little scratches, little dents, etc., so ask before. Often, it’s less expensive to simply repair the small things yourself. Usually, if the scratch or ding is a couple of inches or less, that’s considered normal wear and tear, but always make sure to know beforehand.

Most often, the value of the car at the end of the lease term will have already been decided when starting the lease. If the car is well taken care of, then yes, it could be in your interest to purchase the vehicle. On the other hand, once you purchase the vehicle after 2 or 3 years, that vehicle is no longer under warranty and you’ll be paying for any maintenance that happens after. It’s possible to purchase an extended warranty, but it may be in your best interest to simply lease another vehicle.

GAP Insurance


What is gap insurance? It’s a question many people ask, but it’s incredibly important for lessees. Simply put, gap insurance covers the difference between what your car is worth and how much money you owe on it. Easy enough, right? Well, kind of. Ideally, this doesn’t ever come into play, but let’s cover some scenarios where gap insurance is absolutely indispensable.

For example, let’s say you lease a brand new 2018 Volvo S60 because they are extraordinarily safe, getting top honors from Kelly Blue Book for sedans, and where this example is going, we’re going to be happy that we’ve got a safe car. The Volvo S60 has a starting MSRP of $34,000. Now, as soon as a car leaves the lot, depending on the car, it loses up to 20% of its value.

So let’s say we drive the Volvo off the lot, and not ten minutes later, while we’re in line at a drive-through frozen yogurt shop, a maniac in a Ford truck flies off the main road and pile drives right into the side of your Volvo. You’re not hurt because it’s a Volvo S60, but the Volvo S60 is very hurt, and let’s face it, it’s likely totaled.

Now, without gap insurance, the consumer may be liable to pay the difference between the value and the agreed upon lease term payments, leading to a hefty payment for a car that only lasted one day (but was very safe, mind you).

You see, the insurance company will only reimburse the dealer for the value of the car, but the dealer still wants to receive the money that you agreed upon in your lease term, and without gap insurance, you have to pay that difference or gap.

Increasingly, car dealers are offering leases that already include gap insurance. This is a good thing. Make sure to ask the dealer about that option. If the lease doesn’t come with it, be sure to ask your insurance company about buying gap insurance the minute the lease is final.

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FAQs


What credit score do I need to lease a vehicle?

When applying for any type of loan or lease, you want to have the absolute best credit you can. This allows you to get better rates, it gives you a higher credit line, it also allows you to extend the length of your loan.

On the other hand, if your credit score is bad it will limit your financial flexibility. Bad credit will cause you to get higher rates, limit the amount of money you can loan or lease. It also will limit the amount of time you can extend the loan.

What’s a good credit score you ask?

An excellent credit score will be anything 710 and up, 709 to 690 is good, 689 to 600 is fair, and anything under 600 is considered bad. That’s not including all the variables that make up your credit score, which are:

  • Debt to income (DTI) - if you make a set amount of money and are using over seventy percent of your available income on bills, car payment, mortgage, etc. then it will be harder for a bank to loan you money.
  • How you make your current payments - if you are always on time, general knowledge says you should have a good credit score. But when you make your payments late, naturally your credit score will drop.

However, a high credit score won’t mean you will automatically get a loan or be able to lease a vehicle. There are situations where you could be a 700 or above but have limited credit. This just simply means you have not built enough credit to get a higher loan or lease value.

Answering the question, what credit score do I need to lease a vehicle?

To be on the safe side you should at least have a 670 score or better.

Keep in mind that all those variables mentioned will make or break whether you will be able to lease the vehicle. You should always know your credit score and history when trying to acquire any type of loan or lease.

What’s the difference between leasing and financing?

Here I’m going to try to shed some light on the differences between leasing and financing a vehicle. For the sake of this answer, I’m going to assume that we’re leasing and financing new cars, not used ones. I’m also not taking into consideration the sales tax, registration, and other similar costs, just the big stuff.

Leasing a Car:

  • You pay a monthly payment which is usually less than the monthly payment for financing a new car. (In the same example of the Honda Accord, with a reasonable interest rate and a 2-year lease, you’d pay around $450/month.)
  • Leasing terms usually last 2-3 years at which point you can either loan a different brand new vehicle, or decide to buy the car you’ve been leasing.
  • It SOMETIMES requires an upfront cost, which can range from $0 to quite expensive if you really want to, but normally it’s less than $2000 which is considerably less than the down payment for financing a car.
  • You cannot sell the car during your lease, but you don’t have to worry about selling it either at the end of the lease term.

Financing a Car:

  • You pay a monthly payment. (For example, for a new Honda Accord, with a reasonable interest rate and a 5 year loan, you would pay around $550/month.)
  • The average length of today’s car loans is a little over 5 years although that number can be negotiated with shorter terms having higher monthly payments and longer terms having lower monthly payments but higher interest.
  • It requires an upfront cost (aka downpayment) of usually 10-20% of the car’s total value.
  • You can sell the car at any time, but the loan and financing terms remain until the loan is completely paid off.

It’s important to note that both financing and leasing are subject to interest rates that are always fluctuating. Because of this, I haven’t added that section in.

Monthly Payment Comparison

Two, Three-year Leases:

  • First five years: $450/month × 60 = $27,000
  • Remaining year: $450/month × 12 = $5,400
  • Total cost = $32,400

5-year Loan for a $30,000 Car:

  • First five years: $500/month × 60 = $30,000
  • Remaining year: $0/month × 12 = $0
  • Total cost = $30,000

The biggest difference is that when you’re leasing there’s no end to monthly payments.

What Are the Advantages of Leasing Over Buying?

Leasing over buying; what an interesting concept. Consumers have been trained over multiple years that leasing is a gimmick and purchasing is the only way to go. That’s not true.

In most situations, leasing is much better than buying. The way we purchase a car now is very different than what it was ten years ago. Ten years ago we kept our vehicles until the wheels fell off and then it was time to buy again.

Some of the advantages of leasing over buying include:

  • If the average person drives twelve thousand miles a year, that means during the entirety of your lease you are under warranty. If you choose to buy instead of lease — and even pay the five or six years — you more than likely will be out of warranty on your vehicle.
  • In certain situations, people drive more than twelve thousand miles per year which could take them out of warranty. But you still get a new vehicle more often and have less chance of some major repair happening.
  • Technology in the new vehicles is becoming increasingly better at a more rapid pace. Some manufacturers allow you to use your phone app directly through the system such as YouTube, Waze, Google Maps and even Dominos.
  • Leasing protects you from negative equity by allowing you to walk away from the vehicle in three years if you are in a negative equity situation.
  • One of the best parts of leasing is that the payment is generally fifty to one hundred dollars cheaper a month. Depending on incentives, it could be even cheaper than that.
  • When you get a loan from the bank for your purchase, they own the car, not you. Leasing is no different in that aspect and if you really loved the vehicle, you still have the option to buy the lease.

Purchasing does have benefits, provided you are going to keep the vehicle for multiple years after the loan is paid off. But let’s be honest, that really doesn’t happen anymore.

If you trade infrequently, like the new technology that continuously comes out, enjoy having a warranty, or just like a new vehicle, do not throw money out the window by purchasing, lease the car. It is simply a smarter way to purchase a vehicle. Remember: vehicles are a depreciating asset; they will never gain in value.

How negotiable is a car lease?

Whether you are leasing or buying, you can negotiate a lease just like you can a purchase. The incentives work a little different when leasing, but not much. The price is the price; you can not negotiate a price that you have already beaten down to nothing.

How do you know what nothing is? I mean, it is all super secretive like the Illuminati, right? There are no secrets to negotiating a vehicle purchase/lease, just do some research and you will be fine.

When negotiating a lease or purchase, the first thing I recommend is to go straight to the manufacturer’s website. Their website will tell you what incentives are currently available and even give you lease pricing on the vehicle you build through the website.

Make sure and read the fine print. When you use the manufacture website, it will give you a lease payment based on money down, plus first payment and new license plates.

But manufactures websites will not automatically put in a rebate you may qualify for. They will have an area where you can look at all the offered rebates and the rules to help you qualify, not all rebates are compatible. This is a good starting point.

Can I Switch Cars During My Lease?

Because a lease is technically not a purchase, customers always wonder if they can switch out of their lease if they do not like the vehicle after a set amount of time or if they decide they would like a different vehicle just because.

Whether or not you can transfer your car lease is based solely on your leasing contract and your ability to find a suitable new leaseholder. Currently, around 80% of leasing companies will allow you to transfer your lease, but not all financial institutions allow these types of transactions.

Because of this, it’s imperative to understand the leasing company transfer rules prior to signing the contract. Although you may not initially consider transferring the lease, knowing their policy will give you more flexibility in the event life throws you a curveball, and you need a pinch hitter.

Lease Transfer Checklist:

  • Lease transfer restrictions - some leasing companies do not allow transfers to residents who are out-of-state. Other common lease transfer restrictions include not allowing transfers in the last 12 months of the lease.
  • Post-transfer liability - you could still be liable for any excessive damage to the vehicle or missed payments. So if the individual who takes over your lease racks up excessive wear-and-tear charges, additional mileage charges, or refuses to pay; the leasing company can return to you to demand payment.
  • Transfer fees - these can range anywhere from as low as $35 up to $595. Most lease finance companies will have these types of lease transfer fees. The transfer process can take anywhere from a few days up to months.
  • Replacement lessee - Once you’ve determined your leasing company allows transfers, the next step is to find someone who is willing and qualified to help you out. In an ideal world, you’ll have a close friend or family member with excellent credit who will take on the lease. Since we do not live in an ideal world, you may have to look outside your circle of influence to find a suitable individual.

Manufactures every now and then will run programs for previous customers that allow them to switch out of their lease anywhere from three to six months early.

The way it works is that the manufacturers will give the dealership money to make the remainder of your lease payments, which is a good thing if you like getting into new vehicles more often. The only catch: you have to re-lease a vehicle from them.

Just like with a purchase, you can switch vehicles. In this case, you would be trading in the vehicle instead of making your remaining lease payments. This could be a good or bad thing just like a purchase.

For instance, if you decide you would like to trade your lease in, the dealership will do a vehicle appraisal and see if the vehicle is worth the amount that is left owed on your lease. Essentially, you could owe more than what the vehicle is worth. It could also be worth the same amount or more than what you owe on the lease, which would turn into a wash, or – in other words – be even.

But that is if you are just making the remaining payments and doing what they call an early termination. If you wanted to switch brands, this would be one way of getting out of your lease early.

Common Terminology


When you lease a vehicle, you’ll hear terms like residual value, capitalization cost, and money factor. While some of these terms have been explained, this list includes a few additional common car leasing terms:

Capitalized Cost Reduction: similar to a down payment and can decrease the capitalization cost of your lease. While down payments are not required on most leases, capitalized cost reduction can make your payments lower and be especially helpful for bad credit leasing.

Trade-in Credit: represents the value of your trade-in vehicle used to reduce your monthly payments. Trade-in credits work similarly to capitalized cost reduction.

Security Deposits: usually fully-refundable payments that can be equivalent to a single month’s lease payment. Security deposits can be used to reduce your overall money factor, lower your monthly payment, improve your creditworthiness, and increase your savings. Most leases allow you to make up to seven security deposits.

Lease Inception Costs, Get-In Fees, or Drive-Off Fees: refer to the fees required to start your lease, such as title fees, taxes, acquisition fees, and others.

Early Termination Charge: represents the fees associated with ending your lease early.

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Questions?

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