How to Lease a Car

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If you need a new car, you can lease one instead of buying one. In a lease, you pay monthly rent payments and return the vehicle when the lease ends. What factors should you consider if you’re thinking of leasing?

How to Lease a Car

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You can lease a car from a dealership, manufacturer, or leasing company. You are the lessee, and the company offering the lease is the lessor. Once you settle on a car, you apply for a lease, similar to the way you would apply for financing with an auto loan. A good credit score can help tremendously when attempting to lease a car. 

Next is the negotiation stage. While some terms are set, others, like the interest rate (if you have a high enough credit score) and the length of the lease, are up for negotiation. After you come to an agreement with the lessor, you pay a downpayment, sign the contract, and drive off with a new car. It’s worth noting that some car leases do not require a downpayment, depending on a number of factors.

While you have the car, you’re responsible for maintenance and monthly payments. The lease contract determines how much maintenance and repairs you’ll need to pay for. Some dealerships and manufacturers offer free routine maintenance to lessees. 

When the lease ends, you return the car. You may pay additional fees if you damaged the vehicle or broke the terms of the lease. Some leases give you the option of buying the car at the end of the lease.

What You Should Know About the Lease Contract

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If you lease a car, you’ll have to account for monthly car payments as well as multiple other important obligations. Signing a lease means you agree to pay the rent charge for each month of the lease term. 

If you cancel the lease early, you’ll be responsible for paying a disposition fee. The lease should either state a disposition fee or a calculation for determining it at a future date. In addition to the disposition fee, look for other fees you may incur if you end the lease early. The disposition fee may be equivalent to finishing off all the monthly payments. 

Your lease will also include a statement of the car’s residual value. This is the estimated sales price for the vehicle at the end of the lease. The current sales price subtracted by the residual value equals the expected amount of depreciation during the lease term. Higher expected depreciation is one factor in a higher monthly rent charge. The residual value is a factor in calculating fees for early cancellation or totaling the vehicle.

Do You Need Insurance If You Lease a Car?

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As a lessee, you’ll have possession of someone else’s valuable asset for a number of years. Similar to auto loan lenders, lessors designate minimum auto insurance coverage for lessees. You’ll usually need both comprehensive and collision insurance, and the lessor’s required coverage amounts may exceed the state minimum. It’s wise to get an insurance quote before signing a lease, as some makes and models are more expensive to cover than others.

Wear and tear coverage, and gap insurance are two additional types of insurance specific to leases. Some leasing companies offer these insurances as an optional add-on, and others build it into the cost of the lease.

Wear and tear insurance can cover fees you incur for reasonable damage to the vehicle, such as exceeding the mileage limit or turning in a dirty car. Gap coverage can be a lifesaver if you total the car. Gap coverage pays the difference between what insurance covers and what you owe on the vehicle. (Although you do not own the vehicle, you may be responsible for paying the car’s value if you are unable to return it to the leasing company at the end of the lease.)

What Are The Benefits of Leasing a Car?

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Although there is no prospect of eventually owning the car, leasing is often cheaper than purchasing a car. If you do not pay for your car in cash, you likely need financing. Monthly payments for auto loans are based on the price of the car plus interest and other fees. Monthly payments for an auto lease, on the other hand, are based on the residual value plus interest and other fees. 

Cars are assets that depreciate, or lose value, rather quickly. If you buy a car, you absorb all of the depreciation. With a lease, the lease company is left with a depreciated asset at the end of the lease term. 

Leasing allows for greater flexibility. The longest leases are usually four years long, whereas the longest car loans are generally six years long. With a lease, you have the prospect of driving a newer vehicle every two or four years without many strings attached. When you buy a car, you either have to buy in cash, pay off the original loan, or sell the car for more than the original loan amount to get a new vehicle that quickly. 

What Are The Disadvantages of Leasing A Car? 

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If you dislike or cannot afford a car you own, you can sell it. In an ideal situation, the proceeds from the sale can pay off any remaining balance on your car loan. Then, you’re free of both the car and its financial obligations. Getting out of a lease is a little more complicated. 

A lease is a contract. As the lessee, your responsibility is to keep the car until the end of the loan term and make monthly payments. Failing to keep the vehicle is a breach of contract, and you could ultimately pay hefty fees in the long run. Depending on the lease terms, the leasing company could require you to pay off all the remaining months of the lease. Even if this is not the case, there are various fees for ending a lease early.

When you lease a car, the dealership or leasing company limits how many miles you can drive the car. If you surpass this limit, you may have to pay a fee. Since you do not own the car, you also cannot make upgrades. If you move to another state, you’ll need permission from the leasing company to take the car with you. 

Many drivers enjoy the flexibility and cheaper monthly payments that come with leasing a car. Often, drivers can lease vehicles that they would not be able to afford a loan on. If you’re thinking of a lease, make sure the terms fit your budget and lifestyle.