What to Know About Leasing a Car Before You Buy

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Updated on Sunday, January 31, 2021

More than a quarter of all new vehicles that rolled off dealer lots in 2020 were leased, according to Experian. A car lease could be right for you, too, but there are several important things to know about leasing a car before you sign. Leasing a car offers lower monthly payments, enticing buyers who want to drive new cars but don’t want to deal with a large cash outlay. However, costs can catch up to you if you drive too much or too hard. For the right person, leasing a car can be a good option. These are the things you need to know before you decide whether to lease a car or buy one instead.

The basics of leasing a car

It’s best to think of a lease as a pay-for-use contract. You get to drive and depreciate a vehicle for a certain period of time, then you can walk away.

Most cars lose value over time — this is called depreciation — but the steepest declines happen early. As a new-car lessee, you’ll be driving the car during its most rapid depreciation phase. That’s why, in the long run, continuously leasing new vehicles is one of the most expensive ways to drive. But if you always want to drive a new car, leasing can be a low-hassle way to make that happen. It’s also possible — but less common — to lease a used car.

Leasing certain vehicles may be more difficult. Leasing RVs or boats offer their own unique challenges and the process may differ from leasing a car.

Leasing a car affects your credit score

Applying for a lease triggers a credit inquiry on your report, which has a small adverse effect on your credit score. Car leases are installment loans, and timely payment history will cause your score to increase again. As with any form of credit, late or skipped lease payments drag down your score. Here’s how to view your free FICO Score.

Common car lease terminology

To understand the terms of your lease, these are the definitions you need to know.

  • Gross capitalized cost. This is the total price of the vehicle plus any taxes, fees, add-ons or negative equity from a trade-in vehicle.
  • Capitalized cost reduction. This is anything that reduces the lease loan amount. It could include rebates, a down payment or a trade-in allowance. If you don’t plan to buy your leased vehicle at the end of your term, we recommend not giving a down payment, for reasons we cover later.
  • Residual value. This is the estimated value of the car at the end of the lease. The manufacturer decides the value is and it’s nonnegotiable. The higher the residual value, the more the car will be worth at the end of the lease and the less you have to pay to lease the car.
  • Adjusted or net capitalized cost. This is how much money you are borrowing for the lease. It’s calculated by subtracting the residual value and the capital cost reduction from the gross capitalized cost.
  • Factor, money factor or rate. This is the interest rate of your car lease, but it’s not expressed as an APR (annual percentage rate). If you’d like to convert it to APR to understand it better, multiply the money factor by 2,400. For example a .002 money factor is a 4.8% interest rate. It’s possible to negotiate this rate down with automakers offering lease deals on select models.

How to negotiate a car lease

Unlike car loans, leases most often originate from auto manufacturers rather than banks. However, it’s still possible to negotiate a car lease at the dealership. Anyone who intends to lease should try to drive down the capitalized cost, including dealer fees. Those with good credit should also look to reduce the money factor and down payment.

Another option is taking over someone else’s car lease. In this case you don’t pay a down payment and avoid paying for expensive car depreciation.  There are several websites that specialize in lease transfers.

Keep down payments to a minimum

In a lease, a down payment is a form of prepayment. If you terminate the lease before the end of the lease period or your car is totaled or stolen, you lose the benefit of the down payment. Putting no money down is an important strategy for keeping the lease in your favor. A down payment may not be required for those with strong credit — be careful of zero-down lease deals that disguise high monthly payments.

Research auto insurance costs

Leasing companies typically require a higher level of auto insurance coverage than what is required by your state. You might also be required to carry guaranteed asset protection (GAP) coverage as well, which covers the “gap” between what your insurance provider will pay and what your car is worth in case of an accident. A little research ahead of time can help you compare costs between leasing and buying a car — call your insurance provider to get quotes. It might even provide a calculator where you could plug in the numbers for yourself.

Watch out for leasing fees

Every lessee runs into at least three substantial fees during the course of their lease. Some can be avoided, while others cannot.

  • Acquisition fee. Alternatively called a financing fee, this fee is not a down payment, but a cost to start the lease. It runs anywhere from about $500 for basic compact cars to nearly $1,000 for luxury vehicles.
  • Delivery charge. Also known as a destination fee, this covers the cost of the vehicle being delivered to the dealership lot. This fee ranges around $1,000, is federally regulated and is charged on every new car whether it’s leased or purchased.
  • Disposition fee. This is also known as a purchase option fee. Typically paid at the end of a lease, it’s is what’s also known as a turn-in fee and runs about $300 to $400. Many automakers will waive the disposition fee if you lease again or purchase a new vehicle from them.
  • Mileage overage fee. In addition to these larger fees, many lessees will run into mileage overage fees which range from $.15 per mile for basic vehicles to $.30 for luxury vehicles. You can avoid overage fees by choosing a higher mileage option at the beginning of your lease (which also might be more expensive), limiting the amount you drive or by purchasing the car at the end of the lease.
  • Excess wear and tear. If the vehicle is worn down or damaged and not repaired, and you turn it in at the end of the lease rather than purchase it, the manufacturer may charge you for the cost of repairs or the cost of the increased depreciation.

Budget for maintenance and repairs

Lessees still need to have basic maintenance work performed on the car such as oil changes and tire rotations. Lessees with longer terms may need to buy new tires while they possess the vehicles. Many dealerships offer free or reduced prices on maintenance to customers who buy or lease from them as an incentive. If they don’t offer a maintenance plan, you could always ask for them to throw one in.

And while insurance coverage or the manufacturer’s warranty may cover any needed repairs, the leasee still needs to have those repairs completed.

Lease-end options

At the end of a car lease, you’ll have to decide whether to purchase the car or return it — here are four times when you should consider a lease buyout. One of the big factors in the choice will be what the car is worth compared to the end-of-lease purchase price you agreed to at the beginning of the lease.

If the car is worth more, and you’re able to buy it outright, you could turn around and sell it or use the equity toward a new lease or purchase.

If the vehicle is worth less than the purchase price at the end of your lease, you should probably walk away from the vehicle or attempt some strong negotiations. Of course, the beauty of a lease is that you can hand the keys back to the dealer and move on.

Breaking a lease early could be an expensive proposition. Early termination fees tend to be extremely high. However, it is possible to transfer your lease through websites like SwapALease and LeaseTrader. Trading in your lease for another car may be a second option.


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