HOME GUIDES How Does a Car Lease Work?

How Does a Car Lease Work?

Sean C. Resident Copy Writer/Editor

Purchasing a car is an important and exciting milestone in life. There are so many types of vehicles available—whether it’s a used car or a new car—and it's sometimes hard to choose one. Have you ever daydreamed about sitting behind the wheel of your dream car but then had your hopes dashed by a lack of money? If you haven't looked into leasing a car before, now's the time to start. 

You might be asking, "how does a lease work?" Leasing a car can cost a lot of money if you don't fully understand the best options available. With the right research and information, you'll be on your way to leasing a car and saving money. 

In this guide, we'll guide you through what a car lease is, and benefits and drawbacks of leasing a car, and everything in between. 

What Is a Car Lease?

If you're not ready to buy a car, leasing is an option that lets you have a vehicle for a short amount of time. Leasing can help you learn what you like in a car while saving money for buying one in the future. 

Leasing a car is very similar to renting a vehicle, except you're renting for a more extended period. With a car lease, you can drive a new or used vehicle for an agreed-upon amount of time for a monthly cost. Each payment you make pays for using the car (a lot like a rental) rather than paying to own the vehicle. 

A car lease usually lasts between two and five years. When the lease period ends, you can do one of three things: 

  • Return the vehicle.
  • Purchase the car at market value. 
  • Trade in the car for a new lease, creating a new contract.

Every payment you make on the car is made up of several costs, including taxes, depreciation, interest, and rental charges. 

Leasing Advantages and Disadvantages

While leasing a car is a great way to save money and figure out what you like in a car, it still has some drawbacks. The car is a rental, and once your lease is up, you have to return it. Besides, leasing cars for many years can cost more money than expected. 

Advantages of Leasing

Are you the type that struggles with making big decisions, including what kind of car to buy? Leasing a car lets you test-drive vehicles in a way. You can choose a car and drive it for a few years. 

If you don't like what you had, you can lease or buy a new car in a different colour, interior, or even model when the contract expires. Returning is as simple as ever, too. As long as the vehicle is in good condition, all you have to do is hand over the keys and sign some papers. 

Even if you've been dreaming about the car of your dreams, you can lease one for a lot less than buying the same vehicle model. 

Plus, if money is tight, leasing is the way to go. A several-year car lease will cost much less than financing a car, as the monthly payments are far lower. If you're good at taking care of your car and drive less than 25,000 km per year (the typical mileage cap on a car lease), you likely won't incur any additional fees. 

If you can make monthly payments, leasing a car is a great way to get out on the road without a lot of commitment. You don't need loan approval for a car lease, and the down payment is much lower than if you were buying or financing. 

Disadvantages of Leasing

Leasing a car sounds great. But before you jump right into signing a lease contract, consider the drawbacks. The most obvious one is that you don't own the car, and you'll never own a vehicle if you continue to lease. Once the lease is up, you have to return it - or spend more money to buy it. If you choose not to buy it, you don't have any equity in the vehicle to purchase a new one. 

Most dealerships have policies written out in the contract about the car's condition when you return it. If the vehicle is in poor condition (i.e., stains, tears, scratches, etc.), there may be a penalty. You can do whatever you want when you own a car - put your muddy dogs in the backseat, take it off-roading, etc. - and not have to worry about cleaning it if you don't want to. 

The dealership can also penalize you if you go over the number of miles listed on your contract (usually about 25,000 km per year). If you don't like the car and want to return it before the end of the agreement, expect to pay a hefty fee. 

These penalties are always written in the contract so that there aren't any surprises. Make sure to read through the contract so you don't miss anything important. 

Lastly, if you're looking to save money by leasing a car, don't expect to be in it for the long run. Leasing cars over years and years will exceed the cost of outright purchasing a new or used vehicle. Remember that your credit score needs to be pretty good to be accepted into a car lease.

Difference Between Leasing a Car and Buying a Car

The most significant difference between leasing and buying a car is whether you own the vehicle you drive. Just like with financing a car, the dealership holds on to the car title. However, with financing, you get the title once you make the final payment. You have the car's equity and can make money if and when you decide to sell the vehicle. 

Buying a car incurs a lot more costs and paperwork, especially if you finance. You may need to get a loan, which requires a witness and a solid credit score. Leasing and buying a car each has its advantages and disadvantages. The better option is usually up to the customer and their needs. 

What to Consider Before Leasing a Car

We outlined the essential details of a car lease, but there are a few things you need to consider before saying yes to leasing. 

  • Think of a car lease as you're paying to use the vehicle, not own it. Treat the car as a rental - with care. Keep the mileage cap and any other policies in your contract in mind as you use the vehicle. 
  • Consider long-term expenses. Are you planning to lease cars for many years to come? It will cost more than buying a car. But if you love driving new cars every few years, the extra cost may be worth it. 
  • Keep credit score in mind. Dealerships only approve car leases with customers who have good credit scores (usually above 660). If yours isn't quite there yet, work to improve it. 
  • Form a budget. A car lease incurs a regular monthly payment, adding on to bills that you already have. Consider the cars you're looking to lease, how much they cost and make sure you can afford them.

Can You Negotiate the Price?

Negotiation isn't just an opportunity with a car lease, but it's often expected - especially if you have an outstanding credit score. Negotiating a lease helps drive down capitalized costs and reduces small fees. If you negotiate correctly, you can eliminate costs, including document fees and tire fees. 

You can negotiate some parts of a car lease, but not everything. Know which ones you can get the best deal on, and focus on them. These are the most significant negotiable aspects of a lease: 

  • Capitalized Cost: You should be paying the current sales price of the vehicle. Find cars with the lowest capitalized cost, and research to find the average sales price. 
  • Interest Rate: If you have a great credit score, you can work with the dealership to get a better interest rate.
  • Buyout Price: This piece of a car lease is only essential if you plan on buying the car at the end of the contract. Negotiate the resale value upon signing the contract to save money later. 
  • Mileage Cap: Figure out your yearly mileage and use it to negotiate a higher cap if need be. You can also use it to reduce mileage charges if you exceed the limit. 
  • Trade-In Value: Trading in a car to help pay for your new lease? Negotiate the highest value you can for your vehicle. If the dealer isn't giving you enough, consider selling the car yourself. 
  • Cap Cost Reduction: Find the best car lease deal you can find for your ideal vehicle and negotiate the highest value for a trade-in to get the best cap cost reduction possible. 

Is Leasing a Car Right for You?

Leasing a car isn't for everyone. Customers who have trouble keeping a vehicle in good condition or who drive a lot will have better luck and save more money in the long run by buying or financing a car. 

In terms of money, leasing is ideal if you don't have the money to buy a car or are looking to drive one you typically wouldn't afford. It's also a great way to drive new cars every few years, either to find what you like or to change things up now and then. 

Upon return, the dealer will inspect every detail of the car before setting you free of the contract. If you can take care of your vehicle and do your best to avoid scratches, spills, or other damage, a car lease is right for you.