What Is Car Leasing?

Written by Ashley FranklinUpdated: 6th Mar 2022
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When you’re shopping for a car, the thought of leasing might not cross your mind. But what is car leasing? In this article, we’ll explore the benefits and drawbacks of leasing so that you can make an informed decision about whether it’s right for you!

How Do Car Leases Work?

When you lease a car, you’re essentially borrowing it from the dealership or leasing company for a predetermined amount of time. You’ll make monthly payments during that time, and at the end of your lease, you’ll have several options: you can either buy the car outright, renew your lease, or return the vehicle to the dealership.

Car Leasing Is Different than Buying a Car

There are a few key differences between buying and leasing a car. For one, when you buy a car, you’re responsible for all of the repairs and maintenance that it needs. However, those costs are usually covered by the dealership or leasing company with a lease. Additionally, leases typically have lower monthly payments than buying a car outright.

This makes it easier for many people to afford a new vehicle and can also make it possible for those who wouldn’t typically qualify for financing (like recent college graduates) to get a car.

What Is Important to Know Before Leasing a Car?

There are a few things you should know before leasing a car:

  1. You’ll need to have good credit to be approved for a lease.
  2. Leases usually come with mileage limits. Once you exceed those limits, you may have to pay extra fees.
  3. There may be other costs that aren’t included in the monthly payment.
  4. Always read the fine print!

Open-End vs. Closed-End Leases

When you lease a car, you have the option of choosing between an open-end lease or a closed-end lease. An open-end lease allows you to pay off the remaining balance of the car at the end of your lease, while a closed-end lease does not.

Closed-end leases are usually cheaper than open-end leases, and they’re a good option if you plan on buying the car at the end of your lease. However, open-end leases are a better choice if you’re unsure whether you want to purchase or return the vehicle.

Residual Value

When you lease a car, the dealership will tell you what the “residual value” of the vehicle is. This is the vehicle’s estimated value at the end of your lease. The residual value affects your monthly payment, the higher the residual value, the lower your monthly payment.

Rent Charge

A rent charge is the dealership’s fee to lease a car. This fee covers the cost of maintaining and repairing the vehicle during your lease.

Early Termination Fees

If you decide to terminate your lease early, chances are you’ll have to pay an early termination fee. This is a fee charged by the dealership or leasing company if they lose money due to your terminating the lease before it ends. Early termination fees vary from state to state and dealer to dealer; make sure you read all the fine print.

Gap Insurance

Gap insurance is a type of insurance that covers the “gap” between what you owe on your car and its actual cash value. This is important to have if you’re leasing a vehicle, as it can protect you from having to pay the remaining balance on your lease if your car is totaled or stolen.

Car Lease Term

When you lease a car, your lease term is usually between two and four years. The shorter the term, the higher your monthly payments will be; conversely, if you choose to extend beyond that time frame, it can cost more in total because of an increased residual value.

Lease Buyout Price

The lease buyout price is the amount you’ll have to pay to end your car lease early. This fee includes all of the remaining payments on your contract, any additional expenses (like rent charges), and other costs associated with terminating your agreement.

What Happens at the End of My Car Lease?

You usually only have two options at the end of your car lease. First, you can buy out the car and keep it for good; this is when you pay off all remaining payments on your contract and own the vehicle free and clear. You can also return or “turn in” the leased vehicle to the dealership at that time.

#1. You Have to Return the Car

If you choose to return your car after your lease is up, you’ll need to bring the car back in good condition and with a full tank of gas. If you decide not to buy out your lease, make sure you read all of the fine print before signing anything; there may be additional fees involved if you choose this option or if you damage your vehicle when returning it.

#2. You Have the Option to Buy the Car

Should you decide to buy the car at the end of your lease term, you’ll need to pay off the residual value, plus any other fees (like rent charges) and taxes. This will give you complete ownership of the car.

What Are the Benefits of Leasing a Car?

There are many benefits to leasing a car, including:

  • Low monthly payments
  • Lower overall costs than buying it outright
  • Getting to drive a new vehicle every few years (and avoiding having an outdated model)
  • Not worrying about maintenance or repairs because those are typically taken care of by the dealership

What Are the Risks of Leasing a Car?

There are also some downsides to leasing a car. If you’re not careful, your monthly payments can get out of hand and end up costing more than if you had bought the vehicle outright; this is especially true with open-end leases. You’ll also be stuck paying additional fees (like rent charges) in addition to having no equity in the car, which means you can’t sell it or trade it in for something else.

Be sure to do your research before leasing a car; this will help you know what you’re getting into and how much money might be involved so that there are no unpleasant surprises down the road.

Is it Safe to Lease a Car?

Yes, leasing a car is generally safe. However, it’s essential to read all of the terms and conditions of your lease agreement before signing anything; this will help you avoid any surprises down the road. You should also ensure that you have adequate insurance if something happens to your leased vehicle.

Make sure your budget can afford it and make an informed decision based on the terms of your contract. If everything is in order, leasing a car can be a great way to get more out of every day on the road without having to worry about the high cost of ownership.

Bottom Line: What Is Car Leasing?

Leasing a car can be a great way to get more out of every day on the road without having to worry about the high cost of ownership. However, it’s critical to read all the terms and conditions of your lease agreement before signing anything and ensure that you have adequate insurance if something happens to your leased vehicle.

Car leases are available from several different sources, so be sure to compare your options before deciding. Lease terms are often flexible and tailored to fit your specific needs, so it’s crucial to find the right deal for you. Remember to budget accordingly and make sure that leasing a car is the best option for your lifestyle.

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Ashley Franklin
Ashley Franklin

Ashley Franklin is a professional writer and financial literacy expert. Ashley double-majored in Computer Science and Communications, and she brings her talents to the forefront with writing about personal finance and investing. Having worked with renowned international websites and publications, Ashley has found that there’s no one-size-fits-all solution to financial management. That’s why her articles are all about finding what works for you.