Leasing a car is essentially a long-term rental. You pay a monthly fee to drive the vehicle for a fixed period, typically two to three years, but you do not own it at the end of the contract. It's an alternative to taking out a loan to buy a car, often featuring lower monthly payments. The core trade-off is that you're always paying for the vehicle's depreciation during your lease term rather than building equity.
Your monthly payment is primarily calculated based on the car's depreciation (the difference between its initial price and its predicted value at the end of the lease, known as the residual value), plus a financing charge called the money factor. You'll also agree to an annual mileage limit (e.g., 10,000, 12,000, or 15,000 miles per year). Exceeding this limit results in costly per-mile fees at the end of the lease.
At the start, you'll make an initial payment similar to a down payment, often called a capital cost reduction, plus other fees. When the lease ends, you have three options: return the car and pay any charges for excess wear and tear, buy the car for its predetermined residual value, or lease a new vehicle.
| Lease Component | Description | Typical Example/Data |
|---|
| Lease Term | The length of the agreement. | 36 months (3 years) |
| Annual Mileage Limit | Maximum miles you can drive per year without penalty. | 12,000 miles/year |
| Excess Mileage Fee | Cost per mile if you exceed the limit. | $0.25 - $0.30 per mile |
| Money Factor | The financing charge, similar to an interest rate. | 0.00125 (approx. 3% APR) |
| Capital Cost Reduction | An initial down payment to lower monthly payments. | 10-20% of vehicle's value |
| Residual Value | The car's predicted value at the end of the lease. | 50-60% of MSRP after 3 years |
| Acquisition Fee | A fee charged by the leasing company to initiate the lease. | $500 - $900 |
| Disposition Fee | A fee charged when you return the vehicle at lease end. | $300 - $500 |
| Security Deposit | Refundable amount held for potential damage (not always required). | Equivalent to one monthly payment |
Leasing is best for individuals who prefer driving a new car every few years, want lower monthly payments, enjoy having a vehicle under full factory warranty, and can stay within mileage limits. It is generally not ideal for those who drive high annual mileage, are hard on their cars, or want to eventually own a vehicle free and clear.
