Auto Leasing Basics: Pros, Cons and Costs

While many people still buy a new or used vehicle, leasing is gaining traction. In 2024, approximately 24% of new vehicles were leased, up from roughly 20% in 2023 and 17% in 2022.

Leasing can be a good option for some people, but it's important to understand how leasing works and weigh the pros and cons of leasing versus buying.

What Is an Auto Lease?

Leasing a vehicle is like having a long-term rental—you make monthly payments and drive it for a set period, usually two to four years. When the lease ends, you either return the car, or in some cases, have the option to buy it.

How Does Auto Leasing Work?

People generally lease new vehicles from a dealership, but you can sometimes find leases for certified pre-owned vehicles as well. In either case, the lease is typically financed by the auto manufacturer's financing services arm (e.g., Toyota Financial Services, Ford Credit), although banks or credit unions may also work with the dealership to offer leasing options.

The specifics of lease terms can vary, but some of the main points to be aware of include:

• Up-front and monthly costs: At signing, you may need to pay several fees, a down payment and your first monthly payment when your lease starts. Your future monthly payments help compensate the dealership for depreciation—how much the vehicle's value decreases while you're using it.
• Mileage limits: The lease agreement may come with a mileage cap, such as 10,000 to 15,000 each year. There could be a per-mile fee if you drive more than the allowed amount.
• Repairs and maintenance: The vehicle will usually be covered by the manufacturer's warranty, which could help with any major repairs. You might have to pay for routine maintenance, such as oil changes or tire rotations, but some leases include or offer a maintenance plan.
• Extra fees: You may be charged additional fees if you return the vehicle with more than normal wear and tear, so review the agreement so you know what's considered "normal." There could also be a big penalty if you end the lease early. In addition, you may be charged a disposition fee to prepare the vehicle for resale if you return it rather than buy it or lease another car.
• Buyout price: How much you'll have to pay if you decide to purchase the vehicle when the lease ends.

Similar to applying for an auto loan, when you apply for an auto lease, the lender may check your credit, and your credit score could affect your lease's terms.

For example, a low credit score could lead to a higher monthly payment. Leases technically don't have an interest rate—they use a money factor instead. But you can multiply the money factor on your offer by 2,400 to find the equivalent APR.

In addition to your credit score, the current market conditions, incentives, lease term and the vehicle's residual value—how much the lender will likely be able to sell the vehicle for later—can impact your money factor and monthly payments.

Advantages of Leasing a Car

There are several potential advantages of leasing a vehicle instead of buying one.

• Relatively low costs: Lease payments are typically lower than loan payments for the same vehicle because you only pay for depreciation rather than the full purchase price. In 2024, the average monthly lease payment was $581, compared to $737 for financing, according to Experian. Additionally, up-front costs (including down payments) are often lower.
• Warranty coverage: Most leased vehicles are covered by a manufacturer's warranty and may also include a maintenance plan, reducing out-of-pocket expenses. However, this could also be true when purchasing a new vehicle.
• The latest vehicles: You will always be driving a new car and can get access to the latest luxury and safety tech. If you repeatedly lease vehicles, you get to switch what you're driving every few years.
• Easy return process: You won't have to deal with selling or trading in a vehicle later. At the end of the lease, you can simply return the vehicle without the hassle of selling or negotiating a trade-in.

Disadvantages of Leasing a Car

Leasing might not make sense if you drive a lot or you're concerned about the long-term cost of owning a vehicle.

• You don't own the vehicle: At the end of the lease, you must return the car unless you choose to buy it. Also, you can't make major changes, such as installing a new audio system or getting a new paint job.
• You might feel limited: The mileage limit and early termination fee could leave you feeling stuck, especially if you start driving more than expected.
• There are insurance requirements: Similar to when you finance a vehicle, you may have to pay for full insurance coverage during your lease's term. Many leasing companies also require gap insurance, which can cover the difference between the vehicle's value and what you owe on the lease if the vehicle is totaled.
• You don't have equity or ownership benefits: When you're paying off a car loan, you build equity and get to keep the car—without the monthly payments—at the end. But when your lease is up, you won't have anything to sell or trade in.

Leasing vs. Buying a Vehicle: Which Is Right for You?

Choosing between leasing and buying depends on how you plan to use your vehicle and your financial priorities.

Tallying up the long-term cost, leasing a vehicle tends to cost more than buying it because you never own the vehicle outright. While lease payments are usually lower than loan payments, leasing repeatedly means you'll always have a monthly payment and never own the car (aka build equity).

You're also paying for the period when the car depreciates the fastest—the first few years—so you won't benefit from its retained value later. If your situation changes, you might be stuck with hefty penalties for ending the lease early or driving more than the allowed limit.

On the other hand, leasing can be easier on your wallet in the short run. The lower monthly payments can make it easier to afford a new vehicle, and warranty coverage often reduces repair costs. Leasing also eliminates the hassle of selling or trading in a car when you're ready for something new. If you like driving the latest models and don't mind mileage limits or customization restrictions, leasing could be a good fit.

Tips for a Successful Auto Lease

Leasing may seem like less of a commitment than buying, but it's still a major financial decision. Here's how to prepare and get the best lease possible.

• Identify a few vehicles you want. Test-drive some vehicles and narrow it down to a few options that fit your needs. Cars that hold their value well could be cheaper to lease because they'll have a higher residual value when the lease ends.
• Gather offers. Dealers may offer different incentives, fees and lease terms for the same vehicle. Review the offers and try to make an apples-to-apples comparison to figure out which one is best.
• Negotiate the terms. You may be able to negotiate some of the lease's terms, such as the car's price (called the capital cost), down payment, mileage and fees. Take your best-negotiated offer and see if you can get an even better deal from a different dealership.
• Review the fine print. Take a close look at the lease agreement and make sure you understand exactly what you're signing.
• Have a (rough) plan for when the lease ends. Consider whether you're more likely to return the vehicle, buy it or lease another when the term ends. You can always change your mind later.

Beware of salespeople who overfocus on the monthly payments. Determine the total cost of the lease by adding the sum of all the monthly payments to the up-front costs (fees and down payment) and disposition fee. You could use that when comparing lease offers or weighing the cost of leasing versus buying.

Prepare for Your Next Vehicle

Whether you ultimately decide to lease or buy a vehicle, take time to research your options and compare offers from multiple dealerships or lenders. Checking your credit early can help ensure you qualify for the best terms, and setting aside savings in a high yield savings account can help you cover up-front costs, monthly payments and unexpected expenses. With the right preparation, you could be in a great position to drive away with a vehicle that fits your budget and lifestyle.

READ MORE: How to Save for Buying a Car in 5 Easy Steps