How Does Leasing a Car Work?
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When it's time to get behind the wheel of your next vehicle, you have two financing options available: buying or leasing.
Buying, the more traditional route, typically involves making a down payment and taking out an auto loan, which you'll pay off over subsequent years before receiving the title.
On the other hand, leasing consists of making monthly payments for a set period, usually three or four years, then turning in the vehicle at the end of the lease term. A long-term rental, if you will.
Each type of transaction has particular advantages, and knowing them can help you decide which best fits your budget and needs.
Let's look at the details of how to lease a car.
What is leasing a car?
In many ways, buying a car is similar to purchasing a house. You make a down payment, secure a loan, and make payments over the years before taking full ownership.
Conversely, leasing a car is more akin to renting property, where you gain the use of it for an agreed-upon term while making monthly payments and owning nothing in the end.
Instead of paying for the total cost of a car over the term of a loan, a lease lets you make payments based on the vehicle's future residual value. The residual value takes depreciation during the lease term and is the vehicle's projected value once payments end.
If you lease a vehicle with a capitalized cost of $30,000 and a residual value of $20,000, your payments total $10,000 during the lease term.
Finding and purchasing the used vehicle you want can be a hassle. Not only do you have to perform research and locate the particular make and model, but securing financing can be time-consuming. You can buy any of Shift's cars directly online from the comfort of your home, know it has no hidden issues (from our 150-point inspection) and get a fair, up-front price. When you need to finance, Shift works with a network of trusted lenders who compete for your business, so you get the best deal on financing. And when you apply for financing with Shift, there's no cost or obligation.
Car lease terms
Though leasing a car may sound simple, several factors determine the amount of your monthly payment. And a leasing agreement comes with many restrictions like how much you can drive and vehicle upkeep requirements.
First and foremost are the vehicle's price, or capitalized cost, at the beginning of the lease and its projected value at the end of the lease. The car's value at the end of the lease is the residual value.
The difference between the capitalized cost and the residual value is the amount you make via monthly payments during the lease term. So if the vehicle you lease has a capitalized cost of $45,000 and a projected residual value of $30,000, your total lease payment is $15,000.
Next is the length of the lease term, which is usually 24-48 months. Like an auto loan, the longer the term for a given amount, the lower your monthly payments will be.
Specific to car leases and not required on auto loans is a yearly mileage limit. Standard amounts are 10,000-15,000 miles, possibly requiring you to budget how often and how far you drive. If your vehicle is over the mileage limit when you return it at the end of the lease, you'll likely be responsible for additional fees.
A money factor charge is also unique to leases, similar to the APR on a car loan. The money factor is a financing charge added to the monthly lease payment. A lessor's credit score can affect the money factor they receive.
Because you don't own a vehicle when you lease, you're not allowed to add aftermarket modifications and have to drive it under normal conditions. Modifications and excessive wear and tear aren't permitted when leasing, and if you return the vehicle in less than acceptable condition, additional fees may also apply.
Leasing vs. buying
Both leasing and buying come with their own sets of positive qualities, and weighing all of them can help you make a good decision.
When you buy a car, it's your property, and you can do as you please with it. Whether that's installing a set of unique wheels and tires or tinting the windows, you're free to make it your own. Buying allows you to drive as many miles per year as you want, too, which arguably makes it even more of an attractive option.
And once you pay off an auto loan, you have no payments at all to worry about, letting you drive free and clear of that monthly obligation. And since you own the car, you can sell it or trade it in for your next one.
Leasing usually features lower monthly payments compared to buying, along with the ability to obtain a new vehicle every few years.
Leasing could make it more affordable if you're specifically after a new make and model that stretches your budget. And if you like driving the latest models with the newest features, leasing could be for you, letting you get behind the wheel of something new every two to four years.
Also, you simply turn in the vehicle at the end of a lease rather than needing to sell it or trade it in for a new one. However, it's crucial to remember you retain no ownership, so you receive nothing upon turning it in.
2017 BMW 530i (from $32,450)
How to lease a car in summary
A leased car may seem to have its perks, such as lower payments and the benefit of always driving a newer vehicle under warranty. But along with those perks come drawbacks like the inability to add personal touches, a limit on the number of miles driven, and the requirement to turn it in after the lease term ends.
On the flip side, buying a vehicle gives you the freedom to drive as far as you'd like, perform any modifications you deem necessary, and no longer make payments after your loan term. And if you buy a used vehicle, you can save thousands of dollars off of the cost of a new one while still obtaining one in excellent condition.
When you're ready to buy your next vehicle and need to trade in your old one, Shift makes it easy. You can get a fair offer, better than at the dealership, driven by powerful machine learning algorithms and tons of data. All you have to do is enter the make, model, year, and mileage on Shift's easy-to-use website, and you'll instantly receive a purchase offer that's valid for seven days. Before you sell your car to Shift, there's no need to spend hours washing and waxing. A little dirt won't affect the quote, and Shift fully details every vehicle we purchase ourselves anyway.
2013 Buick Enclave Premium (from $18,950)
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April 15, 2022
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