A car lease is essentially a rental agreement between you and the leasing company that allows you to use the car for an agreed number of miles and months.
Lease payments may be lower than car loan payments for the same make and model because you’re paying for depreciation rather than the full purchase price of the car. But leases can carry hefty fees, and you don’t own the car when the lease ends.
Reading: Average lease payment for a car
Before deciding if a lease is right for you, let’s explore how much you can expect to pay, how your payments are determined, and what types of fees are attached to leases.
- what is the average cost of renting a car?
- how are rental payments determined
- car rental rates
What is the average cost of renting a car?
The average lease payment for a new vehicle is $467 per month, according to Experian’s Q2 2020 State of the Automotive Finance Market report. That’s just over $100 less than the average monthly auto loan payment for a new car, which was $568.
For some popular leased models, the difference in monthly payments was even greater. Since lease payments are determined, in part, by the expected value of the car at the end of the lease, the type of vehicle you choose has a big impact on the cost of the lease.
how lease payments are determined
When you apply for a car loan, it’s easy to get an idea of what your monthly car payment will be: Add up the amount you’re borrowing, add up the interest, then divide by the number of months in the term. of the loan.
When you lease a car, payments are not based on the purchase price of the vehicle. they are based on residual value: how much it is expected to be worth when the lease ends.
Monthly lease payments are calculated by adding the amount of depreciation expected over the lease term (less any down payment or trade-in), rental charge, sales taxes and fees, and dividing the total by the number of months of the lease. For example, if the expected depreciation plus rental charge, taxes and fees is $12,600 and the lease term is 36 months, the monthly payment would be $350.
car rental rates
If you rent a car, you will be responsible for paying various fees, which can increase the cost of the lease. some will expire when you sign the lease and some will expire when you return the car at the end of the lease.
At the time of lease signing, some landlords may require you to make your first and sometimes last monthly payment, as well as a security deposit that can be used if you break the lease or to cover the cost of the end-of-lease payments. .
It is also common for leasing companies to charge an acquisition fee, which helps offset the administrative costs of processing the lease, such as obtaining your credit reports and checking your auto insurance coverage.
See also: Can i get a car loan with bad credit
In addition, you may be required to pay title, registration and documentation fees, plus taxes depending on the state. Depending on where you live, you may have to pay taxes when you sign the lease, or you can transfer the taxes into your monthly payment. If you choose to add the tax bill to your monthly payment, you will pay additional rental charges on top of the taxes and your monthly payment will increase.
When you return the car at the end of the lease, you may have to pay several more fees.
- Excess Mileage: Most leases have mileage limits which are often around 12,000 to 15,000 miles per year. If you drive more than the number of miles allowed on your lease, you will likely be charged a fee, which typically ranges from 10 to 25 cents per mile.
- Excessive Wear: Leases typically include a definition of what is considered normal wear and tear on the vehicle. If you return the car in a condition that does not meet these standards, you may be charged a fee. examples include broken parts, damaged upholstery, and cracked or broken windows.
- Disposal: The disposal fee helps cover the leasing company’s cost to prepare the vehicle for sale after you turn it in at the end of the lease term.
- Early Termination Fee: If you end your lease early, you may be charged charge a fee.
In addition to lease fees, you may also be responsible for paying for routine maintenance and repairs, just as you would if you had purchased the car. In addition, you are generally required to maintain comprehensive auto, collision, and liability insurance. Many leases include differential insurance as part of your lease, and others offer it as an optional feature that you can purchase.
How much it costs to lease a car varies by make and model, expected depreciation, interest charges, taxes and fees. Monthly payments are typically lower on a lease than on a car loan.
If you’re debating between leasing or buying, shop around to explore your options and determine which route makes financial sense for you.
rental calculator vs. shopping for cars
Use our rent vs. rent calculator. car shopping to get a better idea of how much money renting versus buying a car could save you or cost.
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