A car lease is an arrangement in which you pay for the right to drive a new car. Basically, you (the lessee) pay money to the car’s owner (the lessor) for the right to keep the car for an extended period of time. Much like renting a home versus buying one, leasing a car instead of buying it has its upsides and downsides.
Understanding Car Leases
When you lease a car, you don't become the owner. Instead, you get to use the car during the lease term. When the lease period ends, you must return the vehicle to the lessor. (Many leases, however, give you the option to buy the vehicle when the lease ends.)
Car leases typically last two or three years. During this time, you can drive the car for up to a set number of miles, typically between 12,000 and 15,000 miles per year. At the end of your lease, when you return the car to the lessor, the owner will be left with a used car, whose value will be less than what it was when new. The lessor will set your lease payments to make up for that depreciation. For example, say you lease a car that costs $40,000 when new. The lessor assumes that you will drive it to the maximum amount each year (12,000 miles) of your three-year lease. The lessor also knows that this car, with 36,000 miles on the odometer, will be worth 60% of its original value, or $40,000 x .6 ($24,000). In other words, it will have depreciated $16,000. The lessor will set the monthly payments so that, in sum, they’ll total $16,000 (the lessee will also pay various fees and taxes).
Upsides to Leasing a Car
Car leasing offers some advantages. For starters, monthly lease payments are usually considerably lower than car loan payments. With lower payments, you can get a more expensive, better-equipped car—and you can get a new one every few years.
Other advantages to leasing include:
- You typically have lower repair costs with a leased car, because you’re covered under the vehicle's included factory warranty. (In most cases, the vehicle warranty will last at least as long as the lease.)
- At the end of the lease period, you take the car back to the dealership and either lease a new car or simply walk away. You don’t have to deal with selling the car to a new owner or trading it in at the dealership.
Downsides to Leasing a Car
While there are several upsides to leasing a car, there are also drawbacks. For example, because you don’t own the car, you can’t do whatever you want with it. You cannot permanently personalize or modify the vehicle. This means no spoilers or other permanent decorations. Also, if you return the car at the end of the lease in anything less than good condition, you’ll have to pay a fee.
Other downsides to leasing include:
- When your lease period ends, you don’t own the car and you have no equity in it. You'll end up paying more in the long run by leasing cars than if you bought a car and kept it for years.
- If you exceed the mileage limit, you’ll have to pay extra. This penalty generally ranges from 15 cents to 25 cents for every additional mile.
- The upfront costs of leasing, including taxes and fees, can be as high as a few thousand dollars.
- If you want to get out of the lease early, you’ll have to pay a substantial early termination fee, plus the remaining payments, and probably several other penalties and costs associated with getting rid of the car—like the costs related to preparing the vehicle for sale.