Introduction

Leasing a car allows you to drive a new vehicle every few years, often with lower payments and maintenance costs than you’d pay on a financed purchase. After experiencing a drop in popularity, car leasing is making a comeback. According to Experian’s latest State of the Automotive Finance Market report, 24.12% of all new vehicles in 2024 are leased, up from 19.33% in 2023.

How Leasing a Car Works

Before you drive to the dealership, it’s important to get up to speed about how an auto lease works. Here’s a breakdown of the basics of car leasing:

• Lease agreement: You don’t own the vehicle once you’ve completed your lease payments. Rather, you’re essentially renting it from a leasing company that allows you to drive the car for a specified time. Most car lease terms are for two to four years.
• Lease terms: Your lease will lay out conditions you must adhere to, such as the number of miles you can drive each year and the required condition of the car when the term ends. The lease also specifies your monthly payment amount.
• End of lease options: When the lease term ends, you can return the car or buy it. If you return the vehicle, it must be in good condition since the dealership will want to resell it. If it has excess miles, you’ll have to pay a per-mile fee. And while normal wear and tear is expected, you could be on the hook to pay for any damage beyond the agreed-upon condition. If you choose to buy the car, you’ll pay its residual value; that’s the estimated value the dealer calculated and included in your contract when you signed your lease.

Costs of Leasing a Car

Leasing a car may be more affordable than buying one due to lower monthly payments and upfront costs. And since leased vehicles are usually under warranty, you may not have to pay out of pocket for major repairs. Of course, there are several upfront and end-of-lease costs that you must understand before signing for a new lease:

• Down Payment: Many car dealerships require a down payment along with your first payment with a lease. The down payment is often referred to in your contract as a capitalized cost reduction. It lowers your cap cost and, in turn, your monthly lease payments. The down payment amount typically ranges from $0 to $3,000.
• Monthly Payments: The leasing company calculates your monthly payment based on the car’s value and how much they believe it will depreciate during your lease term. According to 2024 Experian data, the average new monthly payment for a leased car is $595.
• Acquisition Fee: The acquisition fee covers the administrative costs of processing the paperwork, pulling your credit, and other setup charges. This fee, sometimes called an origination or bank fee, can cost between $595 and $1,095, according to Edmunds, and be paid upfront or rolled into your monthly payment.
• Money Factor: The money factor is essentially your lease’s interest rate expressed as a decimal. Your lease documents will show your interest as a money factor, which typically ranges from 0.0025 (6%) and 0.0035 (8.4%), according to Subaru. A money factor can be difficult for many consumers to understand, especially if you’re used to working with an interest rate. If you want to know the lease’s interest rate in its traditional percentage form, multiply the money factor by 2400. So, if the lease’s money factor is 0.0025, multiply it by 2,400 to get an interest rate of 6% (0.0025 x 2400 = 6).
• Taxes and Registration Fees: Just as when purchasing a car, most states require you to pay sales tax and a registration fee on a leased vehicle. Most dealerships handle this for you when you sign your lease agreement, but if you want to calculate your fees ahead of time, check with your state’s revenue office and Department of Motor Vehicles (DMV).
• Extra Mileage Fee: Leasing companies want to protect the value of the car they lease to you in case you return it, and they must sell it to someone else. The annual mileage maximum is commonly 12,000 miles per year, or 1,000 per month, though the limit may be higher or lower. Should you return the vehicle with miles on the odometer above the allowance, you’ll pay an extra mileage charge that could range from 15 to 25 cents per mile. Your lease agreement should state both your mileage allowance and the excess mileage fee.
• Excessive Wear and Tear: You could face a fee for excessive wear and tear if you return the vehicle with excessive damages, such as dents, windshield cracks, and carpet stains. The lender could also charge this fee if you don’t follow the car’s maintenance schedule.
• Disposition Fee: If you choose to return the vehicle to the leasing company, they may charge a disposition fee to cover the costs of preparing it for resale. This fee may be negotiable, so be sure to ask the dealer about it before signing the lease agreement.

Benefits of Leasing a Car

While roughly three-quarters of consumers purchase a new car, many choose to lease a car to gain several benefits, including:

• Monthly Payments Are More Affordable: Many drivers desire a new car every few years, which can be very expensive given the high price of new vehicles. But with a lease, you’re primarily paying depreciation and interest, which means you can drive a brand-new car with a lower monthly payment than a car loan.
• Potentially Less Maintenance and Repair Costs: Newer vehicles rarely need significant repairs or expensive maintenance during the first few years, which means less out-of-pocket expense for you. And don’t forget, general maintenance may be covered under the manufacturer’s warranty during your lease term.
• Convenient End-of-Term Options: When the lease is up, you don’t have to worry about selling the car or trading it in, although you may choose to purchase it. You can simply return the vehicle to the dealership. You may be able to purchase the car for less than a similar vehicle if its buyout price is below market value.

Downsides of Leasing a Car

As with any financial decision, it’s important to balance the benefits with the downsides:

• You Don’t Own the Car: Just as landlords generally don’t allow you to modify the place you rent, leasing companies prohibit you from modifying your car. You don’t own the car during your lease, and your lease payments don’t count as equity toward the car’s price if you choose to purchase it when your lease term ends. When you purchase a vehicle, you own it—and all its equity—once you’ve paid off the loan. You can then trade it in for a newer car, sell it to a private seller, or simply enjoy it as long as possible with no monthly payments.
• You Could Face Fees and Penalties: There are some charges you could incur when your lease is up, including fees based on the condition of the car and its mileage. You could pay between 15 and 25 cents for every mile you drive above your lease’s annual allowance limit, as well as charges for any costly repairs the car requires. If you need to get out of your lease early, you could incur an early termination fee.
• Long-Term Cost Could Be Higher: Leasing new cars every few years will typically cost you more than buying a new vehicle and keeping it long term. Also, purchasing your car after making payments on it for a few years could be more expensive than financing a car from the beginning.

How Are Monthly Car Lease Payments Calculated?

Many factors come into play when the leasing company calculates your lease payments. The primary factors are:

• The car’s current value
• How much it will depreciate during the lease
• The term’s length and interest rate (money factor)

Essentially, you’re paying for the car’s depreciation plus interest and fees. You may lower the payments by making a larger down payment.

Should You Finance or Lease a Car?

Deciding whether to finance or lease a car will largely depend on your financial situation, lifestyle preferences, and long-term plans.

You may choose to lease a car if you’re looking for a lower monthly payment. A 2024 Experian study reveals that those who lease their car have monthly payments that are roughly $140 less than those who purchase them. Leasing is also an excellent option if you like driving a new car but don’t want the higher maintenance costs that usually come with a financed car. That’s because the vehicle should be under warranty during the lease term. If you anticipate wanting to move on from the vehicle in a few years, leasing could help you do so without the hassle and time commitment required to sell a vehicle.

However, leasing means you’ll make payments without ownership. That’s a drawback if you like to modify or upgrade your car. Leasing also may not be worth it if you have a long commute, which would kick your odometer over the annual mileage allowance. In that case, you’d incur a costly per-mile fee that could drive up the cost of the lease. Additionally, if you tend to keep your cars for many years, buying might be a more affordable option in the long run.

The Bottom Line

Remember, some of the terms of a car lease, like the car’s price, down payment, and mileage cap, are negotiable. If you don’t like the lease terms even after negotiating, it’s wise to shop at other dealerships for a better deal.

Your credit score is also a factor leasing companies consider when setting your interest rate. As you research your next car purchase or lease, take a peek at your credit and shore up any issues you find. You can access your Experian credit report and score for free to see where your credit stands. Free credit monitoring can also help you stay on top of any changes and quickly address potential issues.

Contact O1ne Mortgage for Your Mortgage Service Needs

If you’re considering leasing a car and need financial advice or assistance, O1ne Mortgage is here to help. Our team of experts can guide you through the process and ensure you make the best financial decisions. Call us today at 213-732-3074 for any mortgage service needs. We look forward to working with you!