If you want to drive a nice new car without the hassle of massive monthly payments or the responsibilities of car ownership, you might be interested in leasing a car. However, when the lease ends, you won’t be the owner of the car, although the dealer may have given you the option to purchase the vehicle as part of the lease contract.
If you like the sound of leasing, this post will answer any questions you might have. We’ll compare leasing with financing and buying, point out the pros and cons, give you some advice on the best credit score, and lots of other useful information.
What Does Leasing a Car Mean?
Car leasing is one form of car financing. In effect, you’re renting a car from a dealership for a certain length of time and a number of miles.
You’ll pay monthly lease payments to the dealer and they’ll let you drive the vehicle. When the lease term is up, you either return the vehicle to the dealer, buy out your lease if you want to keep the car, or exchange the vehicle for another lease.
What Terms Should You Know Before You Lease a Car?
If you’re a newbie to leasing cars, the car-lease agreement might look a little overwhelming if you’re not familiar with some of the language. Before you take out a lease, familiarize yourself with the following terms:
- Open-end leases: At the end of the lease, you might get a refund if the value of the car is higher than expected. However, if it’s worth less than expected, you might have to flash some more cash.
- Closed-end leases: With a closed-end lease you agree on the car’s decreasing value during the lease term. If the car is worth less than the agreed-upon amount at the end of the lease, you have nothing more to pay.
- Capitalized cost: This includes the value of the car plus any other services and fees detailed in the lease.
- Residual value: This is the value of the car at the end of the lease term agreement.
- Depreciation: This is the rate at which your car loses value over time. You pay for depreciation through your monthly lease payments.
- Rent charge: This is the largest cost of a leased car and is similar to interest.
- Use tax: Some states charge a use tax when you take out a lease. It replaces the sales tax you pay when you purchase a vehicle.
- Guaranteed Auto Protection: A lessor may ask you to purchase gap insurance. It covers the difference between the actual value of the leased car and what you owe.
- Early termination charges: If you want to end your lease early, you may be charged an early termination fee.
What is the Difference Between Leasing and Financing a Car?
A car lease is similar to an auto loan, but monthly payments are often lower. There is a downside to lower monthly payments. Rather than building equity in the car, you’re only paying for the privilege of driving it.
To apply for financing, you must approach a bank, another third-party lender, or a car dealership. With a lease, you work directly with a dealership or a specialized vehicle finance company.
The other difference is at the end of the lease term, you must return the car to the dealership unless the lease allows you to purchase it.
What is the Difference Between Leasing and Buying a Car?
Leasing a car means you’re renting it for a limited period. If you buy a car, you own it outright and build equity in the vehicle with monthly payments, should you finance your purchase. Buying a car usually involves higher monthly payments, but you will own an asset (your vehicle) in the end.
Is Car Leasing the Same as PCP?
PCP stands for Personal Contract Purchase, and on the face of it, leasing looks much the same. Both require a deposit and regular monthly payments. However, the main difference is that with a PCP, you pay off part of the cost of the car during the contract period. In the end, you have the option to make a larger final payment and become the owner.
At the end of a PCP, you have three options:
- Hand the car back to the finance company
- Trade the car in for a replacement and sign a new PCO
- Keep the car
What is a Good Credit Score for Leasing a Car?
If you want to lease a car you need a good credit score. The average credit score for someone who wants to lease a car is 745. Generally, a dealership would like you to have a credit score of at least 650, preferably higher.
What is the Benefit of Leasing a Car?
One of the biggest attractions of leasing a car is that the monthly payments are typically lower than if you were financing your purchase with a loan. This is a pretty big advantage but it’s not the only one.
Another benefit is that you can continue to enjoy driving a new vehicle. When the time comes for the lease to end, you simply trade up to the latest model and continue to drive a car that’s got the latest safety features and most up-to-date technology.
Something else that makes leasing very attractive is that there are no ownership hassles. Leased cars tend to be new and almost always have a factory warranty. The out-of-pocket maintenance and repair expenses are minimal. At the end of the lease, you walk away and don’t have the problem of trying to sell it.
What Are the Pros and Cons of Leasing a Car?
- An affordable way to get long-term access to a car
- Low deposits
- You get to drive a better car for a lower equivalent cost
- Minimal hassle
- You’re only renting not owning the car
- Maintenance tends not to be included in the contract
- You pay if the mileage limit is exceeded
- The possibility of end-of-contract damage charges
What Happens When the Car Lease is Over?
When the car lease is over, you have to return the vehicle to the dealership. There it will be inspected to ensure you didn’t exceed the mileage limit and that there’s no excessive wear and tear.
Depending on the type of the lease, you generally have three options:
- Settle and walk away
- Trade and start a new lease
- Buy your lease
At the end of a lease, it’s usual to pay a disposition fee. This is a flat rate you agreed upon when you took out the lease. The dealer uses this fee to get the vehicle ready for resale. You may also have to pay additional charges for mileage overages or excessive wear and tear.
Mistakes to Avoid When Leasing a Car
You might be paying lower monthly payments, but if you don’t pay close attention to the fine print, you could get caught out. Avoid these common mistakes next time you lease a car:
- Paying too much money upfront: It’s recommended you pay no more than around $2,000 upfront when you lease a car
- Not negotiating the lease agreement: The devil is in the detail when it comes to any kind of agreement. There will be several components of the agreement which are negotiable. These might include the buyout price, disposition fee, mileage allowance, and interest rate.
- Not purchasing GAP insurance: Many leases include GAP insurance, but if not, the coverage is worth the additional small investment.
- Underestimating how many miles you’ll drive: Always be aware of your driving habits before leasing a car. Leasing contracts have annual mileage limits of 10k, 12k, or 15k miles. Choose the right one and don’t forget you could end up paying an additional 30 cents per additional mile if you exceed the limit.
Now you know a little more about leasing a car you’re in a better position to decide whether it’s right for you. If you choose to go ahead and lease your car don’t forget USTrans.com if you ever need to ship the car across the country. We provide affordable, safe, and secure car shipping services and will take the best possible care with your leased car.
What is the mileage limit on a lease?
A lease will usually specify a mileage limit. Most car leases allow for 10,000[-15,000 miles on a vehicle per year. Higher mileage leases are often available, but you’ll pay more for the privilege.
Can I make mods to my leased vehicle?
You will be allowed to tint a leased vehicle’s windows, as long as they are compliant with state laws. In addition, factory accessories are allowed. However, third-party or after-market accessories are not allowed.
What insurance is required for a leased car?
Every leased vehicle has to have comprehensive and collision insurance coverage. GAP insurance is also usually recommended. GAP stands for Guaranteed Asset Protection. What this means is that you’re protected from paying out of pocket should the leased vehicle be totalled or stolen.
What happens if I get in an accident in a leased vehicle?
If you total your lease car in an accident, the lease will end before its term. If the accident only resulted in repairable and minor damage, your insurance will cover the repairs.
Can I move out of state with a leased vehicle?
Yes, it is possible to move out of state with your leased vehicle, but you must return the leased vehicle to the original dealership. You will also need to inform the lease company of your move.
How long is a car lease?
Generally, a car lease lasts for 2-3 years. The benefit of this time frame is that the vehicle warranty is normally for 36,000 miles or 3 years so there is minimal risk for out-of-pocket repairs.