If you're thinking about renting or you're one of the 30.6% of all people in the U.S. who currently live in rental housing, you've probably heard about rental agreements and leases. While leasing and renting share many similarities, there are some subtle distinctions between the two.
The main difference is the length of tenancy. A rental agreement is usually short term or month-to-month, while a lease is typically for a longer period of time, usually six months or more. Find out more about what it means to rent or lease and the pros and cons of each.
What Does It Mean to Lease?
A lease is a legally binding agreement between a lessor and a lessee. A lease agreement outlines the terms of the contract and the agreed-upon length of time that the lessee will live on the property and make consistent payments to the lessor.
A typical lease lasts for one year or longer and does not automatically extend beyond the end of the term. However, some agreements do allow the tenant to sign a month-to-month tenancy after the initial term ends.
To prevent disputes, a lease agreement generally also outlines the expectations of both the lessor and lessee, such as the rent and deposit amounts, usage restrictions such as a pet policy, if a parking space is included and other things. Leasing may not be for everyone, but there are some perks to keep in mind.
Pros of Leasing an Apartment
You might lease an apartment for any number of reasons. Maybe the high cost of housing means buying a home is currently out of reach, you previously owned a home but want to downsize or you simply want to lock in a longer term on your next rental. No matter the reason, leasing can have numerous advantages.
- Cost-effective: Signing a longer lease can lower the lessor's cost of maintaining the property and help avoid excessive tenant turnover. For those reasons (and more) a lessor may pass along the savings to you in terms of lower rent because you're willing to commit to a longer tenancy.
- Greater availability: Possibly because of tenant turnover and the increased maintenance costs mentioned above, short-term leases are typically less common than longer-term leases. That might make long-term leases easier to find and broaden your opportunities.
- Fixed monthly payment: When you sign a lease for a year or longer, you can budget for the same payment every month for the term of the agreement, unlike a short-term rental where rent can change without much notice from the landlord.
Cons of Leasing an Apartment
Although there are several benefits to leasing an apartment, there are also a few drawbacks.
- Longer commitment: Leasing tends to come with longer agreements. That means if you are transferred, find a job in another state or lose your income, you may have to break your lease early and deal with the consequences.
- Consequences of a broken lease: When you sign a lease, you make a long-term commitment. If you have to break the lease for any reason, you may be charged a fee, be responsible for paying rent until the end of the lease term or until the lessor can find someone else to lease your apartment, lose your security deposit or all of the above.
- Feeling stuck: You may feel stuck if the lease doesn't allow for changes such as getting a pet, adding a roommate or subletting the apartment.
What Does It Mean to Rent?
Renting involves a contract between a landlord and tenant. It can be a formal contract or spoken agreement and is commonly a short-term or month-to-month arrangement, which might be renewed each month. In return for living on the premises, the tenant agrees to make consistent payments to the landlord.
The rental agreement might include many of the same rules you find in a lease, such as the terms of the tenancy, rent and security deposit amounts, what is included in the price of rent (such as utilities) or if pets are allowed. At the end of the rental agreement, the contract may be renewed. Then again, many rental agreements auto renew unless written notice is given, typically 30 days in advance. Month-to-month tenancy gives renters a certain amount of flexibility. Renting also has other benefits.
Pros of Renting an Apartment
Many people dream of someday owning their first home. However, as of July 2022, average rent asking payments were 12.95% lower than the average monthly mortgage payment in the U.S. While that alone may be reason enough to rent, there are many more benefits as well.
- Wiggle room: A month-to-month agreement can give you a roof over your head while you transition to a new area.
- Flexibility: If you decide you want to live in a different area, you don't have to worry about the consequences of breaking a lease.
- Possibility of negotiation: A month-to-month rental agreement may give you the leeway to discuss the terms of the agreement at the end of each month, such as if you want to split the bills by adding a roommate or adopting a dog.
Cons of Renting an Apartment
Renting has its perks, but there are also several cons to consider before signing a rental agreement.
- Rent hikes: Because most rental agreements are month-to-month, your landlord can choose to raise your rent at the end of the rental term. That said, in some states, there are limits on how much rent a landlord can charge and how much notice you must be given.
- Termination risks: Shorter-term and month-to-month rental agreements may put you at risk of losing a place to live at the end of the rental term. However, some laws may restrict when a landlord can terminate your agreement.
- Potentially more expensive: Because landlords must vet tenants, paint and perform regular maintenance more often, they may charge more rent on a month-to-month agreement to defray the costs.
Leasing Versus Renting
Rental agreements and leases are alike in many ways, but they do have slight differences. For the most part, lease terms are longer, usually one year. But sometimes a lease may be for a shorter length of time. Most rental agreements are month-to-month.
With a lease, your rent cannot change during the contract period. However, your landlord can change the terms of your month-to-month rental agreement with proper notice, usually 30 days.
When you lease or rent, your credit may factor into whether or not a landlord or lessor will approve your application. Generally, the factors landlords look at include whether you've rented in the past and if you have sufficient income and a history of on-time payments to see how well you manage your debts. While a poor credit history may not rule out your tenancy, it could lead to other requirements, like a higher security deposit.
The Bottom Line
Whether you lease or rent, you are entering into a legally binding contract, and it's important that you abide by the terms laid out in the contract. If you break your agreement, there may be consequences. So before you sign, understand your rights and obligations.
If you want to get credit for making on-time rent or lease payments and improve your credit simultaneously, use Experian Boost®ø. With Experian Boost, it's also possible to get credit for eligible bills like phone, utility, streaming services and more. Keep in mind that your rent payments must be made online to eligible property managers or landlords or through an eligible rent payment platform to qualify for Experian Boost.