How to Lease a Car

Car keys and remote

Leasing a car instead of buying is an alternative that works well for many drivers. A lease is similar in many ways to a long-term rental. You pay an up-front cost to initiate the lease and then monthly for the use of the vehicle. The lease you sign will have all of the details of the agreement, but generally, leases offer the driver the option to buy the car at the end of the lease and some allow the driver to extend the lease duration.

In some circles, leases have a bad reputation. These stem from real-world bad experiences and the fear of the new and unknown. If you educate yourself on the general subject of leases, understand your lease terms fully, and compare and contrast your lease with buying and financing, you should be OK. Leases don’t need to be scary, and many people lease cars back to back many times and are quite satisfied with the experience.

Leases don’t work for everyone, and the availability of leases is narrow. Meaning, that you can’t invent a lease you would like to have and then ask for it at a car dealership. Rather, the dealer, manufacturers, and leasing companies they work with offer certain lease structures you can opt into. It is important to understand that not all car leases are the same, nor are all cars offered with great lease deals.

Learn Lease Lingo

Before we go too far, let’s define some terms so we don’t have to call the person who leases a car the “driver” for the rest of the story.

  • Lessee - That’s you. The person who signs a lease agreement and then drives the car and pays for it.
  • Lessor - The entity that provides you with the lease agreement and the vehicle.
  • Capitalized Cost (Cap Cost) - The amount of money in total you pay for the lease of the car.
  • Residual Value - How much the car is worth when the lease ends. This is important. We’ll expand on this below.
  • Closed-End Lease - A lease that defines the value of the vehicle at the end and absolves you of responsibility for most changes to that value.
  • Open-End Lease - Use caution. This lease does not define the value of the vehicle at lease end.
  • Disposition Fee - A fee that you are required to pay if you turn the car in at lease end.
  • Gap Insurance - This is insurance that protects you from being responsible for the gap between what you have paid and the value of a totaled car. A good thing for all involved.
  • Tax and Gap - A term that is often used to explain the added costs to a lease other than the Cap Cost.
  • Cap Cost Reduction - Anything that lowers the cost of the lease to you. It can be a trade-in, cash you pay upfront to reduce your monthly payments, and all forms of incentives and rebates from the dealer or manufacturer.
  • Sales Tax - A tax imposed by your state or a municipality on the lease of your vehicle. In states with taxes, the way they are applied to a lease can vary. In Taxachusetts where Car Talk is headquartered, the tax is applied just to the amount you pay, not the total value of the car. A rare reprieve in a tax-happy state. Having trouble sleeping? Read how Massachusetts explains car lease taxes here.

We will stop short of offering every possible term. Just be sure you take the time to ask what any words you are unfamiliar with mean when you discuss a lease deal with your dealer.

Do Your Research

Leasing a car is just a way to pay for its use for a certain period of time. You still need to research the car itself. Read about the various models you like online and then make a short list of the ones you think you may settle on. At that point, pick up the phone and call your local dealers.

It’s 2022, a pandemic is still lurking in the shadows, a war is raging in Europe, and parts shortages are making vehicles hard to find. Find out which cars on your list are even available to you in the timeframe you have to wait and from that list which are available to lease. Not every model is available with a good lease deal, or any lease deal in some cases. Your dealers will fill you in on the models and trims you can select from to lease.

Decide What Model/Year You Want

Once you have that shortlist of models and trims you can find, and can lease, narrow your selection further to the one or ones you want to try to find a deal on. In 2022 we would be shocked if you find any lease deals that drop the car’s starting price below MSRP, but it’s worth trying.

Set Your Budget, and Stick to It

Vehicle budgeting for many Americans means figuring out what monthly payment one can afford. The evil geniuses that invented leases know that, so they create leases in a way that makes it sound like you can afford pretty much any car since the monthly payments are just “$129 per month.” Or some other ridiculous number. Of course, that is not the actual cost to you for the lease. You will need to pay a lump sum up-front.

Add in the lump sum and your tax and gap, along with your insurance costs and cost of energy to find out what you will really pay for a lease. Maintenance is a minor expense since by the time you exit the lease you will still be doing only minor things at the shop. Many brands include maintenance for three years or more, such as Hyundai, Genesis, and BWM.

Visit Dealerships

There was a span of almost a century when visiting the dealership was step one in car shopping. Now, this is the final step. Use your internet-enabled device and the phone to do almost all of your shopping for a lease in 2022. When it is time to visit the dealer for a test drive or to pick up your vehicle, be certain the car is there and ready.

Negotiate Lease Terms

Just like with a purchase, you need to negotiate your lease. The Cap Cost is negotiable just like the buy price of a car is. The residual value is not as negotiable. The leasing company is likely to set that based on some data they have today.

You have some options when you lease. You can usually decide how many miles are allowable on the lease. It’s not so much a negotiation as a decision. Think ahead to how many miles you plan to drive each year and do not lease a car with fewer miles allowed than you will likely need. This leads to a bad ending when it is time to turn the car in. It has traditionally been more affordable to pay for the miles you need up front, rather than pay a higher per-mile cost for the overage.

Be sure to take advantage of any incentives the manufacturer is offering unless the lease deal specifically excludes them. Shop around. Leases are no different from purchases with regard to negotiating.

Take Great Care of the Car During Lease Terms

One of the few ways to mess up a lease is to mistreat the car while you have it. We get the mindset. It’s going back in a few years anyway, why care for it as if it is “really yours.” Well, it is really yours until you finalize the turn-in. You need to maintain the car according to the manufacturer’s recommendations at a minimum, and some leases specify a few more things you need to take care of.

You also need to repair any minor damage to the car, such as a scuffed bumper, dents, and dings. If you don’t, you will end up paying more for them to be repaired by the dealer at turn-in. Some leases come with an optional insurance plan to cover such minor damage. If you park in the city, give this serious consideration.

In the event of an accident, you are the party responsible for the repairs.

Make Certain to Understand Options at the End of the Lease

Traditionally, the end of a lease offered buyers one or more choices including;

  • End the lease and turn the vehicle in.
  • Buy the vehicle at the residual price already established in the agreement.
  • Extend the lease with a new agreement.

In 2022, these cannot be taken for granted. Early in your research, be sure to ask what your end-of-lease options will be. The option to buy the vehicle at lease end is a great way to ensure that if you over-drive the allowable miles on the lease you can buy the car instead of paying the penalty and turning it in.

A fortunate thing happened to those who leased cars two or three years ago. A supply crunch came just after they leased, and now used cars are in huge demand. Many used cars have prices higher than that same model brand new. These lessees hit the jackpot. They can now buy the car at lease end at a low residual value and have a vehicle with immediate equity. In other words, the cars are worth more than the leasing company predicted.

An unfortunate thing also happened over the past couple of years in the leasing industry. Finance companies live by the “heads I win, tails you lose” philosophy. So they are now beginning to remove the option to buy the car at the lease end, creating some clauses to ensure they don’t lose that value, or they are simply opting not to lease some models. Be sure you know the details of your lease-end options.

FAQ

Is it ever a good idea to lease a car?

Yes, leases work for many drivers. Recent college graduates and those who have recently joined the workforce may find that leasing is a good alternative to financing.

What is the first step in leasing a car?

Before you set your mind on leasing, find out from speaking to dealers if the model you are interested in is even available for leasing. If so, educate yourself on leases. Then, shop around and don’t forget to negotiate.

What credit score do I need to lease a car?

Lenders will look for a credit score in the mid-600s in order to qualify a lessee.

Does leasing a car hurt my credit score?

Quite the opposite. Leasing a car can help you build credit. Of course that all depends on you paying your lease in full, on time, every time.

Can I quit a lease early?

Not easily. Leasing agreements are not simple things to exit. There are some ways, and in 2022 dealers may have an exit strategy for you since the car likely has a higher residual value than they expected it to.

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