

Leasing a car is when you pay to use it for a few years, then return it. You don’t own the car and instead make an upfront down payment and monthly payments in exchange for the right to drive the car for several years.
Want to get a new car? Unless you have enough cash to buy it outright, you'll have to finance it with a loan or lease it. A car lease allows you to use a car for a period of time at a set cost per month plus some additional fees. When the lease ends, you may have the option to buy the vehicle.
Leasing a car is a convenient option, and often a more affordable one, to drive a new car off the dealership lot. Before proceeding, however, make sure you understand how a car lease works to help determine if it's the best option for you.
A car lease is a temporary contract that allows you to pay a monthly fee to use a car for a set time period. Leasing a car differs from financing one because you don't own the vehicle once your term is up. Think of it like renting an apartment, except instead of paying a landlord and abiding by a rental agreement, you'll make lease payments and follow the leasing company's rules on how you can use the car.
A lease is a contract you must follow as long as you have the car. Unlike a car loan, you can't sell your car. When the lease ends, you generally have two options: You can return the vehicle to the leasing company or dealership and pay any agreed-upon fees, or—if your lease allows—you can purchase the car.
A car lease can be two to four years long. While lease terms can vary, 24-, 36- and 48-month terms are common. Keep in mind, the length of your car lease may affect your monthly payment amount and miles allowance
Tip: Longer lease terms often result in a lower monthly payment, though you'll pay more in financing costs.
When choosing a lease period, consider your lifestyle and when you might want to exchange your vehicle for a newer one. Choose a term that suits your needs because you'll have to pay an early termination fee if you return the car early.
A car lease allows you to enjoy the benefits of a newer car with minimal responsibilities outside of your payment and routine maintenance. But leasing a car isn't for everyone. Weighing the benefits and drawbacks of a car lease can help you determine if leasing is a good option.
Enjoy more affordable payments. Lease payments are typically lower than the monthly loan payments for a car purchase. That's because lease payment amounts are based, in part, on the car's depreciation during its lease term, not the car's full value.
Qualify with a smaller down payment. You can usually lease a vehicle with a smaller down payment than if you were financing a car purchase, which may help you get the car for less upfront.
Drive a newer car. If you want to always drive the latest-model cars, leasing could be less expensive than buying and selling a vehicle every few years.
Benefit from warranty coverage. Your car will generally be covered by the manufacturer's warranty throughout the lease term.
Easily return the vehicle. You don't need to worry about selling or trading in the vehicle at the end of the lease, although your lease may allow you to purchase the car at the end of the lease term.
Possibly purchase the car for less than market value. When your lease is up, the leasing company may allow you to purchase the vehicle for less than you would be able to purchase it otherwise.
Leases limit your miles. Car leases restrict the number of miles you can put on the vehicle each year. Mileage limits are usually 10,000 to 15,000 miles annually.
You could face fees and penalties. Leases often impose a lengthy list of charges and penalties you could incur for extra miles, excess wear and tear and other violations of lease conditions. For example, if you drive over your lease's limit, the excess mileage fee could range from 15 to 25 cents per mile.
You could incur an early termination fee. If you no longer need the car, getting out of a lease early can be expensive due to the early termination fee. And you might not be allowed to take the car with you if you move to a different state.
Modification may not be allowed. You usually can't customize the look or features of your car during the lease unless you pay hefty penalties when you return it.
Payments won't count toward a purchase. If you choose to purchase the vehicle once your lease term is up, your lease payments won't be counted toward the car's value.
It could be more expensive long-term. In the long run, leasing will generally cost you more than buying and holding on to a vehicle.
Learn more: Is Leasing a Car a Good Idea?
The minimum credit score needed to lease a car varies depending on the lender or dealership, but typically, you'll need a credit score of at least 670, which is considered good credit. As with taking out a car or home loan, maintaining a higher credit score could improve your odds of approval and favorable lease terms. If your credit isn't ideal, you may only be able to qualify for a lease with higher upfront costs and monthly payments.
Some dealers offer leases on used vehicles, which may be easier to qualify for if you have bad credit. However, the lease may have high fees and lack some of the advantages that come with leasing a new car. For example, you may be responsible for all the repairs and maintenance during the lease.
You might be better off trying to improve your credit and finances before looking for a lease. You could also consider purchasing a used car that's a better match for your budget.
Learn more: What Credit Score Do I Need for a Car Lease?
Applying for a car lease requires many of the same documents you must provide when purchasing a car, such as:
While leasing a car is a relatively straightforward process, it comes with a number of conditions, fees and other factors you must consider. Here's a breakdown of several terms you'll likely see in a car lease agreement. Before you consider leasing a car, familiarize yourself with these terms and how they might affect your lifestyle and finances.
Learn more: How to Negotiate a Car Lease
Deciding whether you should lease a car, buy one or wait may require you to weigh their pros and cons.
A car lease can be a good option for drivers who prefer driving a new vehicle and don't want to pay for routine maintenance and car repairs. That's because the manufacturer's warranty typically lasts through the duration of the lease. This arrangement also benefits drivers looking for a more affordable way to get a newer set of wheels since monthly lease payments are generally lower than loan payments for a purchased vehicle. Additionally, you may lease a car with a smaller down payment than buying a car.
Leasing a vehicle could be a good option if you like the idea of simply returning the car at the end of the lease without the hassle of selling it. If you drive less than 10,000 to 15,000 miles per year, your mileage limits on a car lease may not matter to you. On the other hand, if you have a long commute or frequently take long road trips, then leasing a car may not make sense for you.
Learn more: Should You Buy a Car This Year?
If you want to take advantage of the benefits of a car lease and you're comfortable with its downsides, here are some steps you can take to lease a car.
Taking the time to review your budget, costs and lease terms can help prevent surprises down the road.
Learn more: The Do's and Don'ts of Leasing a Car
Understanding how a car lease works can help you choose the right vehicle, set appropriate mileage limits and negotiate the best deal. It's also wise to maintain good credit to qualify for the lease and receive favorable terms.
If your credit score is a roadblock to a good deal, you might consider taking steps to improve it before applying for a lease. Start by accessing your Experian credit report and FICO® ScoreΘ for free with Experian. You'll discover what lenders see when they review your credit. Resolve any issues you find and follow the best practices to build your credit.
Learn what it takes to achieve a good credit score. Review your FICO® Score for free and see what’s helping and hurting your score.
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Tim Maxwell is a former television news journalist turned personal finance writer and credit card expert with over two decades of media experience. His work has been published in Bankrate, Fox Business, Washington Post, USA Today, The Balance, MarketWatch and others. He is also the founder of the personal finance website Incomist.
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