Leasing a car is essentially a long-term rental agreement. You pay a monthly fee to drive a new vehicle for a set period, typically two to three years, after which you return it to the dealership. You don't own the car at the end of the lease. The monthly payment is primarily based on the vehicle's depreciation (the value it loses during the lease term) plus fees and interest. This is different from a loan, where you're paying to own the asset outright.
A key component of a lease is the mileage limit. You agree to a specific number of miles you can drive per year (e.g., 10,000, 12,000, or 15,000). Exceeding this limit results in costly per-mile charges at the end of the lease. You are also responsible for maintaining the car according to the manufacturer's warranty and for any excess wear and tear beyond normal use, which can lead to additional fees upon return.
Leasing is attractive if you prefer lower monthly payments compared to financing a purchase, enjoy driving a new car with the latest technology and safety features every few years, and want to avoid the hassle of selling a used car. However, you build no equity, and you're locked into a cycle of perpetual payments unless you choose to buy the car at the end for its predetermined residual value.
| Lease Aspect | Typical Details | Consideration |
|---|
| Term Length | 24, 36, or 39 months | Shorter terms often have higher monthly payments. |
| Annual Mileage Limit | 10,000, 12,000, or 15,000 miles | Exceeding the limit can cost $0.25 to $0.30 per mile. |
| Down Payment | Often referred to as "due at signing," can be $0 to several thousand dollars. | A larger down payment lowers monthly costs but is money you won't get back. |
| Money Factor | The lease's equivalent of an interest rate (e.g., 0.00125). | Multiply by 2400 to get an approximate APR (e.g., 0.00125 x 2400 = 3%). |
| Residual Value | The car's predicted value at lease end, set by the leasing company. | A higher residual value leads to lower monthly payments. |
