how a car lease works: a general overview

With no large costs and low monthly payments, leasing a car every few years remains an appealing alternative to buying one. But how do you know if a lease is the best option for you? Here we'll break down what leasing generally entails so that you can feel confident about your next car purchase.

Leasing a new vehicle allows you to drive the car off the lot without having to take out a loan or pay a large sum upfront. Instead you pay a smaller portion of the vehicle's actual cost, followed by monthly installments for the duration of the lease, which is usually 36 to 48 months.

During the lease term, you're given a maximum number of miles you can drive the vehicle in a year — typically around 12,000 to 15,000. Once the lease is up, you bring the car back to the dealership, where they inspect it for damages and excessive wear and tear.

is it better to buy or lease a car?

Whether you should buy or lease your car depends on personal preferences and a variety of lifestyle factors, including:

  • How long you'll need a car
  • How much you'll need to drive
  • How much cash you have on hand
  • Your preference for newer cars

Remember, leasing a car essentially means you're renting it from the dealership for a specified amount of time and mileage. It won't have equity that could be used to buy another car, and the cost of leasing several cars in the span of a decade is likely to surpass the purchase price of a new or used car.

On the other hand, leasing might make sense if you don't have enough cash to buy a car, want a vehicle outside of your price range, won't exceed the specified number of miles, and can take good care of the car inside and out.

Plus, lease terms usually expire before major service or new tires are needed, while buying a car means you could be stuck with costly repairs or maintenance once the warranty expires. Ultimately, though, whether you should buy or lease depends on what feels right for you and your situation.

how much does it cost to lease a car?

The overall cost of a car lease depends on local taxes, the dealership's extra fees, the car's actual value, and how much the vehicle is projected to depreciate by the end of the lease term. That's why it's difficult (if not downright impossible) to provide a penny-for-penny estimate.

But there is a way to at least get a ballpark figure for monthly payments. For example:

  • A new car has a price tag of $30,000. It's projected to depreciate 40 percent by the end of a 36-month lease and 36,000 miles. That means your monthly payments throughout the 36-month term will go toward paying off that 40 percent loss in value.

Next, we do some quick calculations:

  • 40 percent of $30,000 is $12,000 (the total depreciation over 36 months).
  • $12,000 divided by 36 months is about $333.33.

That means you'd pay roughly $333 each month for the next 36 months — plus registration, the acquisition fee, down payment, sales taxes, and any extra fees, for which you can always ask the dealer for an estimate.

Furthermore, if you have strong credit you might be able to initiate a lease with zero down payment and still get a better deal than if you purchased a vehicle.

how to get the best lease deal

Having good credit and searching for lease specials online is a good starting point. But there are still some essential steps you should follow to help ensure you're getting the best deal:

  • Create a list of preferred car types that fall within your price range, and consider costs not associated with the lease such as top safety features that could help lower your insurance premium.
  • Just as you would buying a car, negotiate a price with the dealership, beginning with the dealership's rock-bottom cost for a particular car. Car shoppers can even find out what a new vehicle costs at Consumer Reports.
  • Get quotes from several auto dealers. Make sure each quote specifically outlines the down payment, taxes, extra fees, and total monthly payments. This will help you better compare the different terms and gauge the overall cost.
  • After you've found a deal that seems like the best fit, have the dealer go over the terms again to verify the fine print and clear up any questions you may have. This is also an opportunity to get a feel for the salesperson's level of professionalism, so you can rest easy knowing there won't be unwanted surprises down the road.
  • Once you've leased a car, remember to pay the bills on time and return the vehicle a bit early — preferably just before the lease term expires — to avoid any penalties.

check that your leased vehicle has gap insurance

Gap insurance is particularly vital when it comes to leasing a car since it covers the gap between what is owed on the car and its actual cash value. In fact, this coverage is so important that most lease contracts include it automatically. But if yours doesn't, make sure to add gap insurance to your car insurance policy as soon as possible.

Not yet covered? Get a quick, free Esurance car insurance quote today. And while you're at it, check out our broad assortment of coverage options and many money-saving perks that stack up the moment you purchase a policy. You can also give us a call at 1-800-ESURANCE (1-800-378-7262), where our licensed agents are ready to and answer any of your car insurance questions.

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