Car Leasing: What You Need to Know (Easy to Follow)

Car Leasing Made Easy!

I hate getting ripped off as much as the next guy. As a car guy, I believe there is the "right" fit for everyone regarding their vehicle and their finances.

Everyone has different wants and needs, but in the end, getting a good deal is universal for anyone.

At BuyCarBlog, we're here to help you get to the root of the question and provide practical and easy tips to improve your next shopping experience.

We don't sell anything but wanted to help demystify the automotive industry so you can make the "right" decision.

It's true. Leases are a great way to get into a new vehicle. (I enjoy buying my cars, but I have leased and ended up purchasing at the end of the lease)

Let's look at why leasing vs financing is attractive to shoppers. 

Benefits of Leasing a Vehicle

• Benefit #1 are the lower payments. Getting a lease is more flexible and cheaper than buying and financing a vehicle. However, at the end of the lease, you must return the car in good condition or purchase the vehicle based on the predetermined residual value.
• Benefit #2 is no long-term commitments. It offers a long-term commitment when you rent a vehicle for a period of time. This is as short as 24 months to 39 months with a leasing company. At the end of the lease contract, you return the vehicle.
• Benefit #3 factory warranty and maintenance programs. Leases are typically associated with brand-new vehicles and include a factory warranty that should cover you for your entire lease duration.

However, you might be responsible for regular maintenance if it is not included in your lease. Plus, you will have to cover your insurance premiums as well. In addition, you will also be responsible for any damage to the car upon return.

Leasing has many upsides as long as you understand that your money is not building any equity in the vehicle.

Think about your lifestyle when deciding if leasing is best for you. People who drive a lot may benefit from higher mileage limits. Those who don't drive much may pay too much for unused mileage. You can select Leases with mileage limitations when you sign your lease agreement.

The lowest mileage per year is 5,000 miles, and you can select up to 15,000 miles per year under your lease agreement.

Remember, based on the miles, you are pre-paying for the wear and tear. You must reach the threshold to save money on your monthly/yearly payment.

To understand the benefits of leasing a car with lower monthly payments, fewer maintenance costs, and no hassle of reselling the vehicle, I will discuss these benefits and personal experiences in-depth.

Compared to Financing

On the other hand, car financing, also known as a car loan or a vehicle purchase, involves taking out an auto loan to buy a vehicle. You will own the car in the end and make regular payments towards the loan until it is fully paid off.

Choosing between car leasing and financing depends on your preferences, financial situation, and long-term goals.

By examining each option's specific aspects and considering your circumstances, you will be better equipped to determine which option aligns with your needs and is the right fit for you.

Lower Monthly Payments

As mentioned earlier, leasing offers reduced monthly payments since you cover the car's depreciation throughout your lease. This option is great if you want to save a little each month but drive the latest and greatest.

Another good thing is that leases are flexible. You can buy the vehicle at the end of the lease. This is what I did. I purchased the Nissan Maxima at the end of the lease, which I will get into later in the article.

You can select the term length, number of miles, and vehicle features. You should know that you CAN NEGOTIATE the money factor and the price of the vehicle. We will cover negotiations in a later section.

No Long-Term Commitments

Leases are easy. Choose your options, drive the car, and then return the vehicle.

Again, you must return the vehicle at the end of the lease.

My friend chose the smart option and leased his dream car (Mercedes Benz E43 AMG) at an affordable rate. He now drives a new, reliable car and still saves monthly money. Plus, he owned a business and could write off this lease as a business expense.

Fewer Maintenance Costs

Unlike a used car, new car leases avoid the hassle and problems of repairs.

A factory warranty protects New car leases. As a car guy, I can share many stories of when maintenance costs can be a burden when owning a car. This includes unforeseen engine leaks, suspension replacement, and tires too.

Leasing a vehicle can free you of this worry and let you focus on the joy of driving. Just fuel up and go. With a lease, the dealership will take care of any repairs if there is a defect with a part (Yes, it does happen on new vehicles)

However, it's important to know if your regular maintenance is included with your monthly payment or if you will be responsible for covering the costs.

Some brands like BMW and Toyota include maintenance in their lease program.

For example, BMW leases include 3 years maintenance or 36,000 miles, whichever comes first. Toyota provides ToyotaCare, which covers regular maintenance for 2 years or 25,000 on leases and financed vehicles. Typical service intervals are oil changes, air filters, wipers, and tire rotations. This translates to worry-free driving a reliable car without extra expenses like maintenance for the first 3 years.

Leasing is a great way to save money and enjoy the experience of driving a new car: no surprise bills or repair costs.

Drawbacks of Leasing a Vehicle

The reality of leasing also comes with some downsides or items to consider. Nothing in life is perfect anyways, and it's not full of roses.

It's good to understand the potential drawbacks of leasing a vehicle. You might save money with lower payments, but you might get a bit (like I did) at the end of your lease.

Here are the things you need to keep in mind before going with leasing.

• Mileage restrictions
• Early termination fees
• No ownership or equity at the end of the lease

All these are universal for any lease, so you must understand the cons. If you don't put these into perspective, you might be in for a rude awakening at the end of your lease.

Let's get into the weeds with the drawbacks.

Mileage Restrictions (The Reality)

Mileage restrictions are common with car leasing. You are often limited to 10,000 to 15,000 miles per year. If you don't drive too much, you can ask for 5,000 to 7,000 miles per year. However, be VERY aware that every mile over, you are subject to $0.20 to $0.30 per mile.

Going over this limit leads to extra charges. These restrictions have you second-guessing on a road trip or frequent trips.

For example, if you are over 10,000 miles at the end of your lease in excess, you will have to pay 10,000 x $0.20 = $2,000 to the dealership. If your lease agreement is $0.30 per mile, you are looking at $3,000 in excess miles. Be sure to read the fine print.

It's important to consider how much you'll drive before signing a lease. This is especially true if you are working from home (WFH) or hybrid office commuting.

Early Termination Fees

Leasing contracts come with termination charges. It is important to pay attention to the fine print. These costs can cause financial trouble for lessees.

Termination fees can be hefty to discourage you from terminating early. Unfortunately, many don't know this clause when signing, leading to a financial burden. I wouldn't like This one factor about leases: you are on the hook for the entire lease.

Terms and conditions often have grey areas. The sad reality is that lessees pay undisclosed extra fees, potential damage costs, and a buyout price. Long-term effects can impact you too. Terminating a lease prematurely can help your credit score if you pay the penalties.

No Ownership at the End of the Lease

You don't own the vehicle at the end of a car lease. You must return it to the original owner - often a dealership or financial institution. Plus, extra fees may be charged if you exceed the mileage limit or cause damages.

Leasing a car is not the same as owning one. You can't use or trade it when the lease ends. You must start again from the beginning - paying fees but never owning the car. This indirect investment with no returns can be a financial burden.

You can't make customizations like fancy wheels or advanced sound systems. You must follow the rules, such as wear-and-tear guidelines and maintenance schedules.

Forbes magazine says, "The average cost of new leases is around $450 monthly." Leasing a car is like renting a fancy outfit - except you can be stuck with it for three years!

Negotiating the Lease Terms

Just like financing, you can also negotiate your lease terms. It's important to note that the Money Factor is the interest rate on your monthly payment. Dealerships have figured out how to disguise that as a fraction, but you can often find advertised Lease Specials.

You will want your MF or money factor to be as low as possible. Financial experts recommend looking for a money factor of 0.0025 and below. This is equivalent to a 6% interest rate.

What is the Money Factor?

The money factor, or MF, is the interest rate on the lease. The money factor has been around for years in different forms but became popular in car leasing during the 1980s. Understanding how leasing works and influences monthly costs and payments is essential.

To calculate the APR from the MF, you take the MF and multiply that number by 2,400.

You can negotiate the MF with the car dealer for a better deal. This will convert the MF into a number that is the APR percentage. A lower factor means lower monthly payments.

Many customers need to learn the term Money Factor, and I was also surprised by the term.

When my brother got his lease on his BMW 4 series, he and I discussed the MF. This tip of 0 money down is recommended for leases since you will never get this money back. Luckily the salesperson working with him made it easy, and he did not have to put any money down.

It is not a security deposit.

The money factor is key when leasing a car. It is the interest rate or cost of borrowing money to lease a car or vehicle. A lower factor means lower monthly payments.

Understanding how this affects your total cost and monthly payments is important. Money factor can be expressed as decimals from 0.00001 to 0.05 or as an APR.

Your credit score, down payment amount, and lease length all influence the money factor. For example, a high credit score usually means a lower money factor.

Key Components to Calculating Lease Money Factor

Car Lease Money Factor Calculation involves various factors that impact the lease agreement's overall cost. These factors are essential to consider before entering into a car lease agreement.

To better understand the Key Components of a Car Lease Money Factor Calculation, I have created the following list:

• Capitalized Cost: This refers to the vehicle's total cost, including all fees and taxes.
• Residual Value: This represents the car's estimated value at the end of the lease term.
• Lease term: This denotes the duration of the lease agreement, usually in months.
• Money Factor: This is the interest rate charged by the lease company.
• Monthly payment: This is the amount that the lessee pays each month for the car lease.

Factors Affecting Your Car Lease Money Factor

In car leasing, many factors affect the money factor you pay. Understanding these variables is crucial to get a good car lease deal. Here are some determinants of your car lease money factor:

Factors affecting your car lease money factor

Explanation

1. Credit score

Your credit score is the most important aspect while evaluating your loan application.

2. Residual Value

The residual value is the car's estimated value when the lease ends. A high residual value lowers your payments.

3. Down Payment

A larger down payment typically reduces the principal balance, which yields lower monthly payments.

4. Lease Term

The duration of your lease affects your monthly payments; the longer the tenure, the lower the cost.

It's worth noting that other factors affect your lease money factor, including taxes and fees and annual mileage. Therefore, understanding the car lease money factor allows you to negotiate a better deal with the seller.

To reduce the total cost of the lease agreement, you can negotiate the capitalized cost and money factor with the lease company.

Suppose you have a good credit score and a stable financial position. In that case, you are more likely to get better lease terms and a lower money factor, saving you hundreds of dollars over the lease term.

I joke with my car buddies that Interest rates and APRs are like your ex, always changing and never in your favor.

Residual Value of Leased Vehicle

What about the residual value of your lease vehicle? How does that affect the monthly payment and lease overall?

The vehicle's residual value is predicted at the end of a lease agreement. This value is based on the black book value and considers the vehicle's depreciated value. It's used to work out the money factor.

The typical residual value of a lease vehicle is 55-65% of the MRSP. A bad residual value would be 50% or less of the MSRP.

Brands like Honda, Toyota, Lexus, Acura, and BMW tend to have higher residual value. You will want the residual value to be as high as possible to offset the total monthly payments, so choose carefully which brand you are leasing.

Depreciation happens over time and use. Knowing how the residual value affects your monthly payment can help when negotiating with dealers.

Car dealerships take into account the factors mentioned above. The important point is that the money factor changes based on individual circumstances. Therefore, doing your homework before settling on your lease terms is crucial.

Down Payment and Trade-In Equity

When leasing a car, the amount of down payment and trade-in equity can affect your money factor. The higher your down payment or trade-in value, the lower your monthly payments.

However, I suggest you look at the lowest downpayment possible since you won't get that money back at the end of the lease.

Increasing your down payment and trade-in equity leads to a lower money factor, lowering your monthly costs.

Down payments and trade-in equity can help reduce monthly payments. But, they may only be feasible for some. Some individuals may need more cash or a vehicle with enough equity for trade-in.

Mileage restrictions

Lessees must consider their driving habits before signing a lease agreement with mileage restrictions. Most contracts restrict mileage to 10-15,000 miles per year. Exceeding this limit can cost extra in the end. Short-term deals may have a higher allowance. A lessee can increase limits for an additional fee.

It looks like my ex's car lease had the same policy as our relationship – excessive wear and tear comes with hefty fees! It's important to read the contract and ask about price changes based on varying limits. Also, budgeting helps when returning the car after exceeding mileage limits.

Excess Wear and Tear Fees

When leasing a car, you may have to pay fees for damage beyond normal wear and tear. These fees can be costly, so reading the agreement carefully before signing is important.

Data shows dealerships usually waive the first $500-$1,000 damages. However, if there is excess wear and tear, you will be responsible for paying for it.

Here is a short list of Excess Wear and Tear Fees you might encounter::

Damages (Wear and Term Repair Estimates)

Excess mileage: You may also be charged an additional fee if you exceed your agreed-upon mileage limit, usually $0.20 - $0.30 per mile over the limit.

Read your lease agreement and ask about any potential excess wear and tear fees. Leasing a car means deciding whether to break up or commit at the end of the lease.

End-of-Lease Options

When you are nearing the end of your lease, you have a few options. Typically, either you will buy out the car or turn it in.

I will cover everything you need to know about returning, buying, possibly renewing, or extending your car's lease.

Returning the Vehicle

Once the lease term has finished, most leasees will return their vehicle.

Here are the steps for a smooth return process: 

• Schedule a lease inspection with your dealership
• Clean and inspect the car before returning. This includes any paint repair if needed.
• Avoid exceeding mileage limits if you are over.
• Keep keys, accessories, and paperwork ready.
• Drop off the vehicle at the dealership for the final inspection.

At this point, the dealership will want to explore a new lease with you and get you into a new vehicle.

Buying the Vehicle

When the lease is over, buying the car is a great option! It can be more cost-effective for those who want to keep their current vehicle or avoid excessive wear and tear fees.

I have personally purchased my leased vehicle at the end of the lease. This was because of the excess miles of 10,000 miles on the Nissan Maxima. That would have been a penalty fee of over $2,000. I racked up the miles on memorable road trips and outings with friends.

This was a great option since we knew the maintenance history, and driving was a joy.

• You could negotiate the purchase price with the dealer, but typically, it is just a few hundred off residual
• Be aware of market value and read agreements before signing.

Factors beyond cost may affect your decision. Think about how long you plan on keeping your car, if you want to own it, and its resale value. The pre-pandemic lease would have put you into a positive equity position with the lease buyout. But check with the blue book to make sure.

Renewing or extending the lease

Extending the lease could be a great option to keep your car longer. The extension could be shorter or longer than the original term and have revised terms and conditions.

An extended lease may save you money compared to buying a new car or getting a new lease. Check whether extending the lease is legally possible according to your contract. Reach out to the lessor early, as you may have to return the car if you don't hear from them in time.

Remember - the grass may look greener on the other side, especially if you're standing in a parking lot!

Which Option Is Right for You?

When deciding which option is right for you between car leasing and financing, it is important to consider your personal circumstances and long-term financial goals. Here are some things you need to keep in mind when deciding:

• Monthly Payments: Leasing typically offers lower monthly payments than financing because you only pay for the vehicle's depreciation during the lease term.
• Ownership: Financing allows you to eventually own the car once you've paid off the loan. Leasing requires you to return the vehicle at the end of the lease term.
• Mileage Restrictions: Leasing contracts often come with mileage restrictions, and exceeding them can result in additional fees. Financing might be a better option if you have a long commute or frequently take road trips.
• Flexibility: Leasing allows you to drive a new car every few years without worrying about selling or trading in. Financing allows you to customize the vehicle or sell the car whenever you needed.
• Maintenance and Repairs: With leasing, you're covered under the manufacturer's warranty, so maintenance and repair costs are often lower. Financing means you're responsible for all maintenance and repairs once the contract expires.
• Long-Term Costs: While leasing may have lower monthly payments initially, financing can save you money in the long run as you build equity in the car and eventually own a valuable asset.

Ultimately, the right option depends on your needs, financial situation, and priorities. Consider what matters most and evaluate how each option aligns with your goals.

Conclusion

Leasing a car can be a smarter financial choice for many drivers. Instead of buying outright, you pay for the car's depreciation over the lease period. This can mean lower monthly payments for a fully optioned vehicle. This is especially popular among senior drivers or new families. 

Leasing also offers flexibility. You can upgrade to a newer car every few years without worrying about trading or selling it. But you don't have any equity at the end of the lease, and you are locked in for the life of the lease.

I have tried leasing, and it was a positive experience overall. But be VERY aware of the fees and excess mileage. It can bite you at the end of the lease.

Leasing can provide a unique ownership experience.

FAQs

What exactly does it mean to lease a car?

Leasing a car means renting a vehicle for a specified time (usually 2-3 years), paying for its depreciation, and returning it to the dealership once the lease term is up.

What are the advantages of leasing a car?

Leasing a car has several advantages, including lower monthly payments, no-cost maintenance, and the ability always to drive a new vehicle. Leasing allows you to drive a higher-priced car with the latest safety features without worrying about trade-in value or selling it.

What are the disadvantages of leasing a car?

There are a few disadvantages to leasing a car. It usually costs more than buying because you're paying for the vehicle during its rapid depreciation period. Monthly payments continue indefinitely if you keep leasing, while buying allows you to get more value out of the car over time. You must also pay for excess wear and tear if you don't maintain the vehicle. Terminating a lease early can result in significant fees.

Additionally, you have no equity in the car and cannot sell it if you need to recoup some money.

How does a lease payment differ from a traditional car loan payment?

A lease payment is typically lower than a loan payment for the same vehicle since you only pay for the car's depreciation over the lease term rather than the full purchase price. However, at the end of a lease, you do not own the vehicle and must return it to the dealership.

Can you terminate a lease early?

Yes, but penalties and fees may be associated with ending a lease before the term ends. These include early termination fees and possibly having to pay the remaining lease payments upfront.