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A car lease is essentially a very long-term car rental. You'll make monthly payments over a set lease term like you would with an auto loan, but the key difference with a lease is that you won't take ownership of the vehicle when your payment term ends.
This arrangement often comes with a lower down payment—or none at all—and the chance to drive a brand-new car every few years. Drivers pay about $143 less a month when they finance with a lease versus a loan, according to Experian data (though they won't own the car once the lease is up, as they would with a car loan).
If you're ready to head out and search for a car to lease, be sure to do your research first. Leasing arrangements work differently from other car financing options, so it's important to be aware of the do's and don'ts of leasing a car.
Things You Should Do When Leasing a Car
Here are some of the ways you can set yourself up for success when leasing a car:
Do Understand the Terms
Car leases come with their own jargon, and dealerships may use it when explaining your lease agreement. Before you negotiate, familiarize yourself with what these special leasing terms mean:
- MSRP: The manufacturer's suggested retail price, which is not negotiable.
- Capitalized cost: The sale price of the car, which is negotiable.
- Drive-off fees: Payments you make upfront, such as the down payment (if there is one) and sales tax.
- Residual value: The car's expected value at the end of the lease term.
- Buyout price: The price you pay if you decide to buy the car at the end of the lease.
- Money factor: A representation of the interest rate. You can multiply the money factor by 2,400 to see the number presented as an equivalent annual percentage rate (APR) you can use to compare to auto loan rates.
- Acquisition fee: The administrative costs associated with processing the lease.
Do Compare Offers
Shopping around and getting quotes from various lease companies is the best way to compare offers. Start by researching dealerships that have the car you want to drive in stock at their lot. Contact at least three dealerships and ask for a quote. You may also find lease offers through third-party lenders, such as banks.
The quotes should include the MSRP, capitalized cost, total drive-off fees, monthly after-tax payment, money factor and residual value. You can use your quotes to negotiate with the dealership you want to work with. One dealership may be willing to match (or beat) a competitor's offer—especially if you have good credit.
Do Negotiate
The car dealer calculates your monthly lease payment based on the car's capitalized cost minus its residual value. You pay the difference between those numbers, but negotiating can lower your costs. For example, let's say you want to lease a car with a capitalized cost of $25,000 and a residual value of $15,000. The difference is $10,000. If your lease term is 36 months, then you'll pay $277.78 per month plus interest and sales taxes.
Negotiating a higher residual value and a lower car price will help you save money. Dealerships may also be willing to negotiate other details, such as:
- Mileage limit
- Lease period
- Buyout price
- Lower money factor
- Down payment amount
- Trade-in value
It may be easier to negotiate these details during certain times of the year. For instance, dealerships are motivated to clear their inventory before a new car model arrives or at the end of the year.
Do Check Your Credit Score
Your credit score impacts whether you'll be approved for a lease and the terms you receive. Generally, people with good to excellent credit may qualify for a lease and get the best terms. If possible, consider improving your credit score before applying for a lease. With a lower credit score, you may be required to make a down payment.
Do Get Gap Insurance
If your car is totaled in an accident, a standard car insurance policy may pay you the market value of your car right before it was totaled. However, if that amount is less than what you owe on your car loan, you're stuck paying the difference out of pocket.
But gap insurance, also called guaranteed asset protection, covers that amount, which may save you thousands of dollars. Gap insurance is usually mandatory when you lease a car, and you can shop around for the cheapest rates. Even if your lender doesn't require gap insurance, you may consider adding it to your insurance policy anyway to protect your financial interest in the car.
What Not to Do When Leasing a Car
Leasing can get costly if you don't pay attention to the details. Here's what you should avoid when leasing a car:
Don't Underestimate Your Needs
Before you negotiate a lease, it's a good idea to consider how long you want the lease to last. Generally, longer lease terms come with lower monthly payments and vice versa. You'll also need to know roughly how many miles you drive annually. Leases typically limit you to 10,000 to 15,000 miles per year. If you exceed your mileage limit, you'll likely pay excessive mileage fees at the end of your lease term.
To estimate your mileage, consider your driving habits, such as your daily commute and whether you often take long road trips. Count the number of miles you drive in a normal week, and multiply that by 52. It's best to slightly overestimate your mileage to give you some wiggle room.
Don't Ignore Regular Maintenance
Leases allow for normal wear and tear, such as a few small chips or scratches on the door. But things like cracked windows, large dents or torn upholstery may result in extra charges. The dealer will inspect your car for any damage before the lease is up.
To avoid extra charges, keep up with regular maintenance, like oil changes, and fix any collision damage before handing the car in. You can also check your lease agreement for the dealer's definitions of "normal" and "excessive" wear and tear.
Don't Forget to Read the Fine Print
It's important to read through your car lease agreement and make sure you understand what's in it before signing. Ask questions if you need an explanation. The following details should be clearly spelled out in the agreement:
- Lease term
- Monthly payment amount
- Money factor
- Capitalized cost
- Residual value
- Mileage included in the lease
- Fees and when they may apply
- Taxes you're paying on the car
- Penalties for terminating the lease early
- Down payment amount
- Details of your buyout option
- Whether the lease includes upgrades, such as extended warranties and key replacement coverage
How to Lease a Car
If leasing a car sounds like the right move for you, follow these steps:
- Research which vehicle you want to lease. Choosing a car that tends to keep a high resale value can help you save on your monthly payments. Test drive a few of them to see what you're comfortable with.
- Check your credit score. This can help you check whether you're likely to qualify for a lease and receive good terms.
- Think about your driving habits. Determine the mileage cap and lease term you want.
- Get car loan quotes. Shop with at least three automakers or third-party lenders, such as a bank or credit union. Leverage those quotes to get the best deal, and choose a dealership.
- Sign your lease agreement. After you choose your dealer, it's time to read and sign your lease agreement.
The Bottom Line
It's possible to get a great deal on a car lease, especially when you know what to expect. Don't underestimate your mileage, ignore regular maintenance or forget to read through your lease agreement before signing on the dotted line.
Understanding how leases work, negotiating your lease agreement, comparing offers and getting the right car insurance are all things you should do. It's also a good idea to check your credit score. Having strong credit can set you apart from other applicants, which helps you qualify for the lease and receive good terms.
Worried that your credit score is too low to get a good deal on a lease? Get access to your credit report and credit scores for free through Experian and view the factors that are affecting your score. You can also keep tabs on your score with the FICO® Score☉ tracker as you work to improve your credit health.