How Does Leasing a Car Work?

When you lease a car, you’re really just renting it from a dealership or leasing agency for an extended period. Your monthly lease payments compensate these entities for the car's depreciation as you drive it, plus any additional wear and tear or mileage beyond what’s covered in your lease agreement. Leasing can help you get behind the wheel of a newer car without the financial commitment of buying one. However, leasing may not always be the best option if you’re looking to build equity. 

FINN car subscriptions can put you in the driver’s seat of any vehicle in its vast fleet, from premium sedans and SUVs to electric vehicles and trucks. Your monthly subscription incorporates insurance, registration, maintenance, and depreciation for convenience. FINN also offers flexible terms and delivery to your home, so you can avoid the hassle of leasing and still enjoy the benefits of driving a newer vehicle. 

How does a car lease actually work?

Discovering how to lease a car now isn’t much different than figuring out how to lease a car online. It’s all about learning the rules of the game and what terminology goes along with those restrictions. Once you better understand how a car lease works, you can recognize a lease deal when you see it or negotiate for better terms. Lay the foundation of knowledge first, and you’ll come out of it behind the wheel of a car you want to drive and can afford. 

Car lease terms

Understanding the terms associated with leasing a car remains critical in obtaining a better lease deal. Below are standard lease terms you should know before you start negotiating: 

• Acquisition fee: Dealerships and leasing companies charge lessees an acquisition fee to arrange the lease agreement. Generally, the higher the price of the car, the higher the acquisition fee. 

• Buyout price: This value represents what it would cost to purchase the leased car, including any related fees. 

• Capitalized cost: This figure indicates how much you’ll pay to lease the car. The lower your capitalized cost, the lower your monthly payment. 

• Capitalized cost reduction: Any dealer rebates, trade-in values, or down payments you make fall into this category. 

• Depreciation: All cars lose value over time, but a lease quantifies this loss in value based on mileage and time. 

• Disposition fee: Dealerships charge this fee because they have to prepare and sell the leased vehicle after you return it. Similar to the acquisition fee, disposition fees may be negotiable, depending on the leasing company. 

• Early termination fees: Terminating your lease early can result in steep fines. 

• Money factor: Also known as the lease factor, this figure quantifies in decimal form the projected value of the car after the lease ends. You can multiply the money factor by 2,400 to get the interest rate equivalent. 

• Residual value: The residual value on a car lease represents how much value it retains after the termination of the lease. Cars that depreciate slower often have higher residual values and lower monthly payments.

Specific language may vary between dealerships and leasing companies, but the general concepts remain the same. Ask if you’re unsure what amount corresponds with a particular term or condition. It’s better to clarify than assume and potentially pay for it later. 

How to lease a car

It’s often easier to understand how to lease a car when you break it all down into manageable steps:  

1. Research what car you want, from the make and model to the specific year and trim. 

2. Request your credit report to gauge your credit score. 

3. Determine how much you can spend monthly and overall for your car lease. 

4. Shop around for offers on your chosen car with your budget in mind. 

5. Negotiate a lease agreement after test-driving the car and haggle any trade-ins or fees. 

6. Finalize your new lease and drive away. 

Each car leasing journey may look slightly different, but this basic process should give you a better idea of what to expect. Read on to learn more about car leasing and what you should know before signing any lease agreement.  

How is a car lease different from a car loan? 

The difference between car leases and auto loans resembles renting or buying a home. When you rent (or lease a car), you cannot change anything about that asset without the owner's permission. Your monthly payments don’t go toward paying down a mortgage (at least not your own), unlike your car loan payments that go toward paying down the vehicle’s purchase price. In addition, you must pay for any damages you incur to the property beyond what’s considered normal wear and tear. 

When you come to the end of your lease term, you must return your leased vehicle. Then, you can extend the lease, negotiate another lease, purchase a car outright or with financing, or subscribe to a vehicle through subscription companies such as FINN. When you pay off your car loan, you receive the title, which grants full vehicle ownership. You can then sell the car or do whatever you want with it. 

How long is a car lease? 

Car leases can span anywhere from six months to three years, depending on your contract terms. Most lease agreement terms are expressed as a number of months, so three years would be 36 months. Some lease agreements include an opportunity to extend the lease by a few months, but most car leases tend to be shorter than the average car loan term. 

Most car leases are what’s known as a closed-end lease, versus an open-end lease. With an open-end lease, you pay the difference between the residual value and fair market value of the vehicle at the end of the lease term in a balloon payment. During an open-end lease period, the number of miles you drove and any excessive wear and tear come to bear on the amount you pay. 

What credit score is needed to lease a car?

The best time to lease a car happens when you have a good credit score. The higher your score, the more likely you’ll qualify for a lease contract with a low money factor and favorable terms. Ideally, a credit score over 660 gives you the best odds of finding a lease agreement that makes financial sense. If you have bad credit, consider improving your score upfront before pursuing a car lease. 

What is the mileage limit on a lease?

The mileage limit on a lease restricts how many miles you can travel during your lease term. If your lease mileage limit is 12,000 miles and your agreement lasts for a year, you have roughly 1,000 miles you can travel every 30 days. If you travel less during one month, you can travel more the next and still be below your limit. 

Mileage limits on leases help control the car’s depreciation rate. Thus, learning how to avoid paying excess mileage charges by staying within those limits can help save you hundreds of dollars or more. Most lease agreements include several mileage limit options (the higher the limit, the more you’ll pay), and you may be able to purchase additional miles when signing the lease. With lease mileage limits, it’s better (and costs less) to be safe than sorry. 

What happens if you get into an accident in a leased vehicle? 

If you get into an accident in a leased vehicle, follow the same procedures as any other vehicle in filing a claim with your insurance company and calling the police. Notify the leasing company that you’ve been in an accident and ask for further clarification on how they’d like to handle repairs. Depending on the state of your leased vehicle, they may require the car to be towed to a specific mechanic or dealership. 

What happens at the end of a car lease? 

Upon termination of a car lease, lessees must return the leased vehicle to the leasing agency or dealership. Lessees may be subject to a turn-in fee and any applicable fees for excess mileage, wear and tear, or car disposal. At the end of the lease, customers can either walk away, buy the leased vehicle, lease another vehicle, or purchase a car outright or with financing. FINN car subscriptions also offer a convenient solution to getting behind the wheel of a new vehicle without breaking the bank. 

Is leasing a car right for you?

Several factors can dictate how well vehicle leasing a car fits into your lifestyle. One of the main concerns for most people is the financial commitment car leases require. Balance the monthly payments with the overall cost of your lease to determine if you can afford it based on present circumstances. Then, any negotiations you can accomplish will ensure you’re well within budget. 

Another consideration requires reviewing what your goals are for the near future regarding car ownership. Do you want to build equity in a car and take on most of the costs associated with financing and maintaining that vehicle? Would you rather spend time with a few different cars before you invest in a particular model? This facet of the decision relies heavily upon your personal preferences. 

FINN car subscriptions can offer a win-win solution that’s convenient and affordable. You can choose from numerous makes and models and have any of them delivered to your door. FINN also offers flexible terms to subscribe to a car for six months up to two years. 

Pros of leasing a car

• Lower monthly payments

• Long and short-term leases available 

• Fewer repair costs

• Reduced maintenance burden 

• Drive newer cars

• Potential for the option to buy

Cons of leasing a car

• Car payments don’t build equity 

• Restrictions surrounding mileage, modifications, and other terms

• Best auto lease deals require stellar credit 

• Warranty coverage may not align with lease length 

• Car insurance may cost more 

• Some leasing companies don’t offer a purchase option 

• GAP insurance can increase monthly payment