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What does It Mean to Lease a Car?

Diana Bocco
Updated May 23, 2024
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If you have decided to get a vehicle, you probably know you have two basic options: to lease a car or to buy one. There are advantages and disadvantages to each option, but leasing can be a solution if you don't have the credit or the money to buy a vehicle right away. Leasing is essentially a form of long-term rental.

When you lease a car, you are basically paying for the right to use a car for a time period, usually for three years. After that time, you simply return the car, trading it in for a different model or year. In most cases, you are not leasing the car directly from the dealer or owner of the car, but with the leasing company. The bank or a car dealer buys the car from the manufacturer, and then leases it out to you or someone else.

It's important to remember that leasing is not the same as buying. Monthly payments tend to be smaller, as you are not making payments to pay off a loan that you took out to buy the car. In fact, after 36 months, the average person has only paid the equivalent of 50% of the car's price. This is because leased cars are priced higher than cars available for sale. Once the three years are over, most people simply return the car and take a new one.

For those who want to buy the vehicle, there is normally a purchase option in lease contracts that allows the lessee to keep the car by paying the difference on its value. The biggest disadvantage, however, is that the price of a leased car tends to be at least several thousand US Dollars higher than the actual market value. For this reason alone, most people simply return the car after the leasing period is over.

When you lease a car, you have very low upkeep expenses, as most leasing companies will offer warranty coverage for the three-year period that you are making the payments. There are also tax deductions in place for people who lease cars for business purposes. The major disadvantage of leasing is the fact that you are stuck with your choice for at least three years. If you decide that you want to end the lease early or change the car, you will incur penalties. In addition, at the end of the lease, you must return the car, so you have nothing to show for the money you've spent.

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Diana Bocco
By Diana Bocco
Diana Bocco, a versatile writer with a distinct voice, creates compelling long-form and short-form content for various businesses. With a data-focused approach and a talent for sharing engaging stories, Diana’s written work gets noticed and drives results.
Discussion Comments
By anon270553 — On May 22, 2012

It is almost always beneficial to lease cars if you can keep your mileage under 15,000 per year.

One thing though: $505 per month on a BMW X3 may or may not be a good deal. If you put $4,200 down to get that payment, then you have to average that into your $505 car payment. Over the course of a three year lease, that would mean your payment is more like $619.00 a month, which is not a great deal on a $40,000 automobile.

Now $505 with $0 down is good, but not great either. I've seen better.

By anon153057 — On Feb 16, 2011

The best practice when buying a car is to purchase within your means. Some dealerships will promote the use of leasing merely as a way to provide a lower payment for a car you typically would never fit within your budget.

Yet for the right situation, leasing has it advantages. If you plan on driving the vehicle within your allowable mileage allowance leasing may be your best option.

I like to look at leasing as the most transparent option. Leasing brings all of your true automotive cost like depreciation to the surface as your monthly payment. To understand a lease's benefits, you simply need to understand how a lease is calculated.

The first step is to figure out the monthly depreciation (MD), this is done by subtraction the residual (end value) from the purchase price including things like freight and PDI. This figure is your total depreciation over the full term of your lease. Now divide this figure by the number of months of your term. There we go, we are halfway done the math.

Next, we figure out your monthly interest, now add the end value to the purchase price and times it by your lease money factor. To calculate the lease money factor simply divide your interest rate by 2400. Now add your depreciation to your monthly interest and add your applicable taxes. Done!

Now having an understanding of the math, you can understand the basic benefit of leasing. Not a single car buyer on this planet can avoid the cost of the first steps of this calculation. Even if you pay cash, the car, the piece of metal, will still depreciate.

The next benefit is you are less exposed to future values, during the recent downturn companies like Chrysler (and almost all manufactures) lost millions of dollars on lease end residual values. If these customers bought instead of leasing, it would have been the consumers' loss, not Chrysler's.

The third real benefit of leasing is flexibility. You simply owe less on a lease because you don’t owe the taxes on your purchase like you would on a financed vehicle. You also pay more principal on some leases within the first half of a term vs. financing.

By anon125564 — On Nov 09, 2010

what if i want to return the car already? i used it only for three months. is that OK?

By anon111021 — On Sep 14, 2010

So, after a lease is over, you simply return the car and lease another one if you want?

By Bhutan — On Jul 24, 2010

Suntan12- That is a great deal. It is important to mention that when you negotiate with a dealer, you discuss the price of the car, not you what your monthly payment will be.

The reason is simple. The dealer can offer you a lower monthly payment but charge you a higher rate of interest. Always ask about all potential promotions and rebates along with the dealer costs.

The dealer cost can be worked down a bit. Also, try to get your deal at the end of the day, and be prepared to leave if the deal does not meet your needs.

By suntan12 — On Jul 24, 2010

Comfyshoes- My husband once leased a Ford Excursion and he loved it. The leasing company was Ford Motor Credit.

I think most car companies have a leasing company as an extension of their operation. I have noticed that almost all of the dealerships have a leasing company that shares its name.

By comfyshoes — On Jul 24, 2010

Anon83418- You asked a good question. Usually leasing is reserved for new vehicles. You might want to go to a dealership and see what the financing would be. Most used cars are considerably cheaper than a new car so you might find the financing option attractive.

I usually lease my car for a period of 36 months with 12,000 allowable miles per year. I love my car, but I will return it after the lease because the residual value according to the finance company is $30,000, for my car.

So if I chose to buy it, then I would have to pay $30000 for it. I decided to return my car after the lease and just buy a car instead.

I got a good deal on my lease. I was only paying $505 for my BMW X3, which is a great deal. But I got my car in late August and the dealer was eager to make a deal.

By anon83418 — On May 11, 2010

how much would it cost to lease a nissian maxima 2007?

Diana Bocco
Diana Bocco
Diana Bocco, a versatile writer with a distinct voice, creates compelling long-form and short-form content for various...
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