How Does Leasing a Car Work and Is it Ever Worth it?

Leasing a car (or other motor vehicle) involves taking possession of a car for a fixed period of time (term), for a fixed amount of money as a monthly payment. Leasing is offered as an alternative to purchasing a car.
 
The main difference between leasing and purchasing is that when you purchase a car it becomes yours once the car loan is paid in full. With a lease, when the term ends, the vehicle has to either be returned to the leasing company or purchased for the residual value.
 
In this article we’ll discuss what is car leasing and how to lease a car.
 
For more information regarding car financing and leasing, please call us at 866.287.6225 to schedule a no-obligation loan consultation.
 

How Leasing a Car Works

Leasing a car is easy once you know the steps and what make leasing different from a car purchase. Leasing a car includes:
  • Identifying the make and model you want.
  • Shopping around and comparing prices from dealerships.
  • Negotiate the price (yes, you can negotiate the price of a leased car!)
  • Completing a loan application, which includes giving the lending company permission to pull your credit and review of your credit score.
  • Deciding the term (number of years) of the lease and choosing the mileage limit.
  • Signing a lease contract agreeing to the lease terms.
 
The Federal Trade Commission provides these helpful tips before you sign:
  • Consider all of the lease terms. When you lease, you are responsible for excess wear and damage and any missing equipment. You also must service the car according to the manufacturer’s recommendations and maintain insurance that meets the leasing company’s standards. If you end the lease early, you often have to pay an early termination charge that could be substantial.
  • Might you move during the lease period? Some leases may not let you move the car out of state or out of the country. Find out the rules for the deal you are considering.
  • Are you a service member who leased a car? Federal law lets you terminate the lease with no early termination charges IF:
    • you leased before you went into military service and then went on active duty for at least 180 days, or
    • you leased a car during military service and then got a permanent change of duty station outside the continental U.S., or got deployment orders for at least 180 days.
 

How Leasing a Car Differs from Buying a Car

As we mentioned earlier, leasing a car is often thought of as a long-term rental, with the main difference being that once the lease is up, the car must be returned to the leasing company, or you may choose to purchase the car from the leasing company.
 
How does leasing a car work? All lease agreements require you to select a mileage limit, usually between 10,000 and 15,000 miles. The mileage limit is the exact number of miles you are “allowed” to drive per year, which figures into the depreciation of the car’s value over the course of the lease term.
 
If you know you’ll need more miles, this could add to your monthly payment. If you choose a lower number of miles and go over that amount, you will be charged a penalty for exceeding the mileage limit.
 
If you purchase a car with a car loan, you will pay your monthly loan payments for a specific length of time that you agreed on with the loan company, however you will own the car when the loan is fully paid-off.
 

Is Leasing a Car Worth it?

While it’s exciting to purchase a car and think of it as your own, the truth is, if you are purchasing a car with a loan, then you don’t actually own it until the loan is fully paid. During this time the car will depreciate and then you own an older car that is less valuable.
 
Why lease a car? Many people prefer to lease because leasing allows them to have a brand new car at the end of every lease term, which is generally two to three years.
 
Which option you choose depends on your unique needs. Here are some pros and cons for car leasing, courtesy of Edmonds.com:
 
Car Leasing Pros:
  • You have lower monthly payments with a low — or no — down payment.
  • You can drive a better car for less money.
  • You have lower repair costs because you are under the vehicle's included factory warranty.
  • You can more easily transition to a new car every two or three years.
  • You don't have trade-in hassles at the end of the lease.
  • You pay less sales tax.
 
Leasing Cons:
  • You don't own the car at the end of the lease (although there is always the option to buy).
  • Your mileage is typically limited to 12,000 miles a year (you can purchase extra).
  • You may find lease contracts confusing and filled with unfamiliar terminology.
  • You'll pay more in the long run for a leased car than you will if you buy a car and keep it for years.
  • You could face excessive wear-and-tear charges. These can be a nasty surprise at the end of the lease.
  • You will find it costly to terminate a lease early if your driving needs change.
 

Credit Score to Lease a Car

As with all loans, the higher your credit score, the lower the interest rate you’ll pay on the loan amount. According to Experian data, the average credit score for a car lease in the second quarter of 2020 was 729.
 
While you can lease a car with a lower credit score, you’ll likely pay a higher interest rate to do so. Having a low credit score or bad credit could prevent you from getting a lease or cost you more in interest over the course of the loan, and may even limit your choice of vehicles. This is because lenders associate low credit scores with higher risk of non-payment.
 
If you have less than perfect credit, you can learn how improve your credit score.
 

Mistakes to Avoid When Leasing a Car

Whether you’re new to leasing or have been leasing for years, here are some common mistakes to avoid when leasing a car:
 
Paying Too Much Upfront: In the event that your car is totaled or stolen early in the lease period, if you put a large chunk of money down, the insurance company would reimburse the leasing company.
 
Not Buying Stop Gap Insurance: Allstate explains, Gap Insurance helps pay off your auto loan if your car is totaled or stolen and you owe more than the car's depreciated value. Also called "loan/lease gap coverage," it helps pay the gap between the depreciated value of your car and what you still owe on the car.
 
Underestimating Miles: If you underestimate the number of miles you drive in a year, and go over your chose mileage limit, you will be charged a fee-per-mile as a penalty.
 
Not Maintaining the Car: Some leasing companies will cover routine maintenance, such as oil changes, in the lease agreement. But even if routine maintenance isn’t covered, you should always maintain the car for safety reasons. This includes rotating the tires, having all of the fluids checked and refilled.
 
If major repairs are needed at the time your lease is up, the leasing company could charge a hefty price for making those repairs.
 
Leasing the Car for Too Long: Because leases are generally meant to be short-term, if you choose a longer-term lease, the warranty could run out just around the time the car starts to need repairs.
 

When Is it Better to Buy a Car?

If you have your heart set on purchasing a car or don’t feel comfortable with the restrictions associated with leasing, that’s okay. Here are some of the advantages to buying a car, according to the auto experts at Edmonds.com:
  • You can modify your car as you please.
  • You'll save money over the long term if you buy a car.
  • You can drive as much as you like. There's no excess mileage penalty.
  • You have more flexibility since you can sell the car whenever you want.
  • You can use the car as a trade-in on the next car you buy.
 
Is leasing a car ever a good idea? Yes, if you plan to keep the car short-term and can meet all of the lease agreement terms. After you’ve done your research the most important thing to do is to choose the option that works best for you.
 

Why Savvy Consumers Choose CU SoCal

We understand you’re more than a credit score, which is why CU SoCal lends on character and not just on credit scores. If you’ve been turned down for an auto loan because of a low credit score, or need help buying a car with bad credit, we can help. Learn more.
 
Please give us a call today at 866.287.6225 to schedule a no-obligation consultation with one of our auto loan experts.

Building Better Lives

Credit Union of Southern California (CU SoCal) is a leading financial institution empowering those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County to reach their goals and build strong financial futures. CU SoCal provides access to convenient money management services and offers competitive rates and flexible terms on auto loans, mortgages, and VISA credit cards—turning wishing and waiting into achieving and doing.

 

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