What Happens When You Lease a Car?

Are you thinking about getting a new car? Buying a car is a big step. There’s a ton to consider—what type of car do you want? Do you want a newest model? How long do you want to keep your car? You also need to consider things like your lifestyle, how often you travel and more.

If you’re having trouble deciding, there is another option—leasing a car. But how does it work? What happens when you lease a car, exactly? We’ll delve into all the details you know, so you can make the right decision for you.

What Happens When You Lease a Car?

Leasing a car is a lot like renting one—but for a much longer period of time. When you buy a car, you own it after you’ve made all your monthly payments. But when you lease a car, you’ll make monthly payments, drive it for a set amount of time and give it back to the dealer when your time’s up.

Though leasing isn’t a fit for everyone, it can be convenient and is worth considering. Here are seven reasons leasing a car might be a good option for you.

1. You Get to Drive Newer Cars

If you’re the kind of person who likes driving a new car, leasing your vehicle may be a better option than buying one. Cars can wear down quickly, so if you buy a new car, you might owe more than it’s worth after you make the initial purchase.

But if you lease instead of buy, you can continue driving new cars indefinitely—simply trade in your old car lease for a new one every few years. That means you’ll have access to the latest features, like better navigation, back-up cameras or music players. You might even be able to lease an expensive car for an affordable monthly payment. But there is a downside—you’re never quite done paying for leases if you stick with this option.

2. You Probably Pay Less Up-Front

Traditional car loans usually come with somewhat hefty down payments. But if you lease instead, you’ll likely have a lower down payment than you would with a normal loan. In fact, some dealers may not require a down payment at all.

This means you pay much less up-front for the use of a car. That lets you get a car you might need while potentially putting extra money toward home repairs, a vacation or payments on existing debt.

3. You Get to Drive a Safer, More Reliable Car

When you lease, you’ll probably drive a newer car, which can be a safer and more reliable option. The newest cars have the most recent safety features and are compliant with current safety regulations, which older cars might not meet.

Plus, because a newer car has less wear and tear, it’s less likely to break down and leave you stranded on the side of the road. There aren’t any guarantees, but keeping up with maintenance on a vehicle can help keep issues to a minimum.

4. You’ll Likely Spend Less on Repairs and Maintenance

Speaking of maintenance: Who is responsible for repairs on a leased car?Yes, a newer car often needs fewer repairs. But when issues do come up, repairs will often cost less if you lease your vehicle.

Most of the time, the vehicle you’re leasing will still be covered by the manufacturer’s warranty, so you won’t have to foot the bill for many expensive repairs. There’s also a good chance that basic maintenance, such as oil changes, are covered in your lease agreement or car warranty. Always read the fine print to understand who is responsible for what before you sign a car lease.

5. Your Monthly Payments Might Be Lower

When you lease a vehicle, you pay for the vehicle’s depreciation during the lease. When you buy, you’re paying taxes, fees, special finance charges and the full price of the vehicle.

That means monthly lease payments are often lower than loan payments. Obviously, this type of statement can’t be applied across the board, and someone with stellar credit and a valuable trade vehicle might be able to get a loan with lower payments. Always do research to find out where you stand personally before making a big purchase.

6. You Don’t Have to Worry About Selling Your Car

Selling a used car can be a hassle. With leasing, you skip it entirely. Instead, you drop the car off with the dealer when the lease is up. Then you’re free to lease a car again or purchase a new one without worrying about trade-in value or an ownership transfer.

7. You Might Pay Less Sales Tax

If you buy a car, you pay taxes all at once for the full value of the vehicle. When you lease, you pay taxes on your monthly payment and spread that cost out over time. This can result in a lower total tax payment.

Things to Remember About Leasing a Car

Leasing instead of buying comes with some great potential perks. But it’s not an ideal solution for every person. If you decide to lease a car, you there are a few things you need to keep in mind.

1. A Credit Check Is Still Required

Leasing isn’t the same as a normal car loan, but it’s still a form of financing. A dealer will check your credit to make sure you’re eligible for a lease. In fact, you might need a higher credit score to lease than you would need to buy.

If you have a low credit score, you might pay a higher interest rate or be denied financing altogether. It’s always wise to keep an eye on your credit report throughout the year to look for errors or other problems. For the best rates, make sure your credit is in good shape before you apply for any type of financing, including a car lease.

2. You Might Have to Stick to a Mileage Limit

Leases come with mileage limitations. The Federal Reserve notes that average limitations are between 12,000 and 15,000 miles per year. You can pay extra for higher mileage limits, sometimes as high as 100,000 miles annually, but that does significantly affect the cost of the car lease.

3. You Get Charged for Extra Wear and Tear

Leases require you to keep the vehicle in good condition. If you turn it in with stains, scratches, dents or dings, you’ll have to pay extra charges. Should you lease a car, take good care of it.

4. You Could Be Penalized for Terminating the Lease Early

Car leases work a lot like other lease agreements. If you terminate your lease early, you might be subject to significant penalties and fees—just like you would be if you broke an apartment lease early.

5. You Can’t Modify the Vehicle

Lease agreements have strict rules, and if you violate the agreement, you’ll be fined. Modifications will likely violate the warranty or lease terms—even if they’re modifications you consider upgrades, such as shiny new rims or a more powerful sound system.

Should You Lease or Buy a Car?

Leasing can be a good option if you’re comfortable with the limitations in the lease agreement and it makes financial sense. If you’re still on the fence, ask yourself the following questions to determine whether you should lease or buy a car.

• How much do you drive each year? If you love going on epic road trips, leasing might not be the best option. But if you need a car simply to get to and from work and to run errands around town, a lease might work for you.
• How much do you want to spend up-front? If you don’t have a large down payment saved, you might get into a new car faster by leasing instead of buying. However, if you have excellent credit, you might not need any down payment to buy a new car, so always research your options.
• Is driving a new car important to you? If you’re okay driving the same car for the next 10 to 15 years, you should probably just buy one. However, if you want to consistently drive newer vehicles, leasing is one of the easiest ways to do that.
• Does vehicle maintenance frustrate you? Because leased cars are newer, they usually have fewer maintenance issues. And when those issues do come up, they’re often covered under the manufacturer’s warranty. If you don’t want to think too often about maintenance, leasing might be a good call. You can also consider buying an extended warranty when you purchase a car for the same results.
• Do you have good credit? Sometimes you need better credit to lease a car than to buy one. If you’re still working on repairing your credit, you might have to purchase a car instead of leasing one. Not sure where your credit stands? Consider signing up with ExtraCredit to get access to 28 of your FICO scores, which include three auto scores per bureau.
• Do you care more about short-term or long-term savings? Leasing is a great way to save on up-front costs. It also usually results in smaller monthly payments, which makes leasing a perfect option if you want to save money right now. However, in the long run, leasing might cost more than buying because you don’t own any property at the end of your lease.

Make the Right Choice for You

When deciding whether leasing or buying a car is better for you, carefully consider all the factors. It’s important to take your own needs and preferences into account to determine which is the most reasonable solution. Research local lease options and check out the auto loans available through Credit.com partners to understand your choices.

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