How Does Leasing a Car Work?

How Does Leasing a Car Work?

What Is a Car Lease?

A car lease is an agreement between a lessor (the company that owns or will buy the car) and the lessee (the person who will pay to borrow the car).

When you lease a vehicle, your monthly payment will be calculated based on the vehicle’s depreciation—the change between its current value and its value at the end of the lease—plus interest and fees.

Your lease agreement covers the following:

  • How much you have to pay at the start of your lease.
  • The lease’s length—typically a lease lasts for two to four years.
  • How much the car is currently worth and how much it’s expected to be worth at the end of the lease.
  • The fees you’ll have to pay at the end of the lease.
  • The “money factor” or rent charge, which is similar to an interest rate on an auto loan.
  • Possible termination fees if you want to return the car before the lease ends.
  • How many miles you’re allowed to drive each year. Many leases only allow you to drive 10,000 to 15,000 miles annually; you may be required to pay a per-mile fee if you go over the limit.
  • How the lessor defines normal wear and tear and how much you’ll have to pay if there’s excessive wear and tear. If you smoke in the car, have kids, transport pets or park on a busy street, you increase the chances of fee-inducing incidents.
  • What happens if you miss a lease payment.

Some of the rules may seem restrictive, but remember, you don’t own the vehicle. The lessor keeps the title, and you have to return the car in good condition at the end.

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What is a short-term car lease?

When you lease a vehicle, you agree to use the car for a specific number of months and miles. After the lease ends, you must return the car to the dealership or, if the option is available, buy it.

There’s no official guideline for what length of car lease is “short” term — some auto industry experts consider any lease 24 months or less short term. Others define it as less than 36 months. Leasing terms at dealerships typically range from 24 to 60 months.

Short-term car lease or long-term car rental — what’s the difference?

Some car rental companies allow monthly rentals for longer periods of time that might compare to a short-term lease. One of the biggest differences is the financial commitment.

A car rental may allow for early cancelation, and if there are cancelation fees, it’s possible they could be minimized if you give a certain amount of notice (24 hours is the rule for some agencies, but it varies). On the other hand, short-term leases have set start and end dates, and charges for ending a lease early can be high, according to the Consumer Financial Protection Bureau. Simply giving the car back and stopping payments is not an option.

The process of getting a rental car versus a lease is also a lot simpler, from a financial standpoint. Typically, you can rent a car if you have a credit card (or sometimes even just a debit card). With a lease, the process involves a review of your credit.

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What are the disadvantages of leasing?

The main disadvantage of leasing is that you don't build equity in the vehicle as you make lease payments. Lease terms can be anywhere from 2 – 5 years but can be ended early, though early termination typically involves a cancellation fee.

What About New Car Leasing?

Autoflex is auto leasing without limits! If you want a new car, come to us for the same level of service. In fact, you can sit with one of our specialists and configure your favorite brand of vehicle as you would with the OEM. Let’s say you want to lease a Chevy Silverado. Let us help you put together the package that’s right for you. We’ll get your truck here at the best lease possible. Now, you might be wondering what happens to the new car warranty if you get a vehicle from us instead of the OEM retailer. Great question. Maybe you prefer to lease a Ford F150 over the Silverado. No problem. Your F150 shows up with its new car warranty in place, just like it would be from the OEM retailer. No tricks. No gimmicks. Just savings and great auto leasing.

Mistakes to avoid when leasing a car

Leasing can lower your payments, but it can wind up being very costly if you don’t pay attention to the fine print. Avoid these five common mistakes if you decide to lease your next vehicle.

1. Paying too much money upfront

Car dealers advertise low monthly lease payments on new vehicles, but you may have to pay several thousand dollars upfront to get that affordable payment. That money covers a portion of the lease in advance.

If the car is wrecked or stolen within the first few months, your insurance company would reimburse the leasing company for the value of the car, but the money you paid in advance likely would not be refunded to you. You’d be out of a car, and that upfront money you handed over to the leasing company would essentially disappear.

It’s recommended you spend no more than about $2,000 upfront when you lease a car. In some cases, it may make sense to put nothing down and roll all of your fee costs into the monthly lease payment. If something happens to the vehicle before the end of the term, at least the leasing company doesn’t have a big chunk of your cash.

2. Not buying gap insurance

If you drive a leased car, you should pay for gap insurance. The “gap” refers to the difference in what you still owe on your lease and the value of the car.

Let’s say your contract states that at the end of the lease, you have the option of buying the car for $13,000. If you total the car before the lease expires, your insurance company will determine the current market value of the car and pay that amount to the dealership which owns the vehicle.

If the insurance company says that the market value is only $9,000, you’ll probably have to pay $4,000 out of pocket to cover the difference between the lease contract’s residual value and the true market value — unless you have gap insurance. The gap coverage will cover the difference.

Many leases include gap insurance. The dealer may offer to sell you gap insurance, but you may find a cheaper policy option with a traditional insurance company. Regardless, the coverage is well worth the small investment.

3. Underestimating how many miles you’ll put on a car

To avoid extra charges, know your driving habits before leasing a car. Consider your daily commute and how often you take long trips. If you know that you’ll probably drive more miles than the agreement allows, you could ask for a higher mileage limit. However, that will probably increase your monthly payment, because additional miles will result in greater depreciation.

It’s common for leasing contracts to have annual mileage limits of 10,000, 12,000 or 15,000 miles. If you exceed those mileage limits, you could be charged up to 30 cents per additional mile at the end of the lease.

For example, if you exceed the mileage limit by 5,000 miles, you could end up owing an extra $1,500 — at 30 cents per mile — when you turn the car in at the end of the lease.

4. Not maintaining the car

If your car has damage that goes beyond normal wear and tear, you could be on the hook for additional fees when it’s time to return it to the dealer.

If a car has a scratch but the mark is less than the width of the edge of a driver’s license or business card, many companies may consider it normal use and probably won’t charge a penalty. If the leasing company considers any damage excessive, it can charge additional fees.

The definition of normal use can vary from dealer to dealer. Your lessor will inspect the car before you turn it in and look for dents and scrapes on the body and wheels, damage to the windshield and windows, excessive wear on the tires and tears or stains in the interior upholstery. Don’t assume that your inspector will be lenient.

Before leasing a car, ask about the guidelines on the lease-end condition. These guidelines specify the types of damage you would have to pay for before you return your car.

If the car is significantly damaged, drivers can expect to be charged full market prices for repairs.

5. Leasing a car for too long

If you lease a car, make sure that the lease period either matches or is shorter than the car’s warranty period. Warranties vary from manufacturer to manufacturer, but they typically last up to three years or 36,000 miles, whichever comes first.

If you keep the car for longer than the warranty period, you may have to consider an extended warranty. Otherwise, you could be responsible for maintenance and repair costs for a car you don’t own while still making monthly lease payments.

If you do plan to lease a car for an extended time, it’s probably better to buy it, says Barbara Terry, a Texas-based automobile expert and columnist.

“If the driver owns the car, he’d have to pay for the car and pay for maintenance, but then he could continue to drive it for several years without having to worry about a required monthly lease payment,” Terry says.

Use an auto lease calculator to figure out whether leasing or buying a car will save you more money over the long haul.

Possible advantages of short-term car leases

A short-term car lease can be an attractive option if …

You want to drive the latest and greatest

Addicted to that new-car smell? A shorter-term new car lease means your lease will be up not long after that smell wears off, freeing you up to lease another new car.

You need temporary wheels

If you only need a car for a little while, a short-term lease might be a good option. Maybe you’re relocating for your job for a year and your new commute would benefit from a more fuel-efficient vehicle. A short-term lease could work if you need a car that fits your situation for a couple years or so — or less.

Not sure whether to lease or buy? Explore Auto Loan Options

Which type of term should I choose?

People lease cars for many different reasons, but most of the time it’s because, for affordable monthly payments, you can get behind the wheel of a brand-new car every few years. At the end of the contract, the car is taken off your hands with nothing more to pay, provided it isn’t damaged and you’ve stuck to the agreed mileage.

In this instance, leasing is essentially long-term vehicle rental and a term which is three years or less is one of the most popular options, and here’s why.

Short-term leasing

Short-term leasing

Although short-term lease agreements aren’t what the average person would choose, there are circumstances whereby it can come in handy.

Certain providers are now offering vehicles with contract terms as little as three, six, nine or 12 months. The idea is to outprice the competition from hire companies which have for so long specialised in offering immediate, flexible access to a car or van.

This can be useful if you’ve had a sudden change of circumstances, such as a job or house relocation, and need a car without long-term commitment. It may also be an option if your current motor has a problem and needs to go in for repair.

Delivery will be quicker than that of a standard 2-3-year agreement, often taking less than two weeks. However, it isn’t a solution to a longer contract (e.g. if you planned to take out several six-month deals) as monthly payments will be higher, costing you more.

2-3 years

Most providers will offer two years as the shortest car lease length because, as the owner and registered keeper, they lose a large chunk (around 40%) of each vehicle’s value in the first year of it being driven. Although the monthly payments will be more expensive to cover this depreciation, it’s often too short a time to recycle the vehicle afterwards into used car finance offers, such as PCP (Personal Contract Purchase).

As such, a deal which lasts 2-3 years is much more attractive to the person who is leasing. Not only are the monthly rentals cheaper, thanks to them being more spread out, but you will also reap the most benefits from the manufacturer’s warranty.

A standard warranty will last three years or 60,000 miles (whichever comes first), which means any mechanical or electric faults not caused by driver error will be covered for the duration of the agreement.

What’s more is that a new car which is less than three years old won’t require an MOT by law. Even if you chose a three-year deal, it won’t be your responsibility to pay for the vehicle to be tested and serviced at an approved garage.

Long-term leasing

On the opposite end of the spectrum, you may like having a car for as long as four years – the typical maximum limit for a lease contract.

Long-term leases offers similar perks to vehicle ownership, such as having a vehicle you want for a longer period, but without the hassle of needing to sell it afterwards.

The monthly payments, which make up the bulk of a lease, will be cheapest if you choose this type of deal too. So, if you have your heart set on a certain car, but your budget doesn’t allow you to stretch to a shorter contract, you may find spreading the cost this way works better for you.

An additional cost you’ll need to factor into long-term leasing is the cost of an MOT, which is around £60. Also, any servicing that needs doing as a result of the MOT will need to be arranged and paid for by you too.

For complete cover for routine servicing and the cost of an MOT, it’s worth considering a maintenance package for your vehicle. This will be offered at a fixed monthly price, which will either be added to your rental payments or as a separate cost.

You can find out more about leasing maintenance packages in our other guide here.

Car Leasing in Dallas, Texas, Made Easy

$0 down. $0 security. ZERO games. Our lease specials are some of the best near Fort Worth, TX. How does it all work? Glad you asked. First, you’ll probably browse our website to see if we’ve got something in stock. Chances are, we do! Right here at Autoflex, you can get a Kia lease or a Tesla lease. All brands are available. What’s important is that you love what you find. From there, you’ll give us a call or an email and connect with a sales specialist that will take you through your entire deal from start to finish. No mystery-folks. No “one second I’ll be right back” trips to the manager’s office. Your specialist will structure your deal with you and handle financing, signing, and delivery. Easy.

How to Lease a Car

If leasing sounds like the right option for you, here are some steps to take to prepare:

  1. Check your credit score to make sure you’re likely to qualify to lease a new car.
  2. Determine how much you can afford to put down and how much you can afford to pay each month. Don’t forget to include insurance, registration, gas and any additional expenses that come with owning a car in your budget.
  3. Start test-driving different cars to figure out the make and model you’d like to lease. If you’re open to a few options, that could give you wiggle room during negotiations.
  4. If you’re trading in a car, try to find its current market value and make sure you’ll receive enough to pay off your car loan balance. You could consider selling the car on your own and using the funds for a down payment on the lease. Or, negotiate the cap cost and trade-in separately to avoid potential confusion.
  5. Consider your driving habits and how you expect to use the car to determine what mileage cap you want.
  6. Shop around to see which dealership will offer you the best lease terms—a low down payment, low monthly payments and few fees. You could try to pit lessors against one another to get the best deal.
  7. Sign a lease with the lessor that offers you the best deal. Be sure to read the entire agreement to make sure it reflects what was promised during the negotiations.

Preparing to lease a car involves evaluating your finances and researching cars and lease terms. Doing so will not only help you get the best deal, but could help you get into the car of your dreams.

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