Gears icon with text, lease a car.

If you’re the type that craves a new set of wheels every few years, leasing a car may be an attractive option. While we don’t want to be a backseat driver, you should familiarize yourself with these car leasing essentials before you head to the dealership.

Leasing vs. Buying

Leasing a car is the auto equivalent of renting an apartment — you make monthly payments for an agreed upon amount of time (industry standard is three years) during which you use the car like it’s yours. But when the contract’s up you have to return it, and you don’t get your money back.

Leasing can be a smart option if you enjoy that fresh-off-the-lot smell, love having the latest gadgets, or drive often for work and can deduct auto-related expenses on your taxes.

Buying a car is like buying a house. When you purchase a car it becomes your asset. Monthly payments go toward your eventual ownership of the vehicle.

When you purchase a car you pay for the total price through cash, auto financing, a vehicle trade-in, or a combination of the three. When leasing, you typically make a down payment followed by monthly payments throughout the duration of your contract. Your payments cover the difference between the retail price of the vehicle (MSRP) and its expected value after depreciation over time (residual value), plus fees and general upkeep costs.

The Process of Leasing a Car

Leasing can sound complicated, so let’s break it down to help you navigate leasing with ease.

Learn the lingo

Lease contracts are full of jargon, which can make it tough to understand what you’re agreeing to.

It’s important to know these key terms:

  • Buyback price: The cost to purchase the car at the end of the lease.
  • Capitalized cost: Aka “cap cost”, this is the total amount of the lease. It includes the negotiated price of the car you’re leasing plus additional fees and taxes.
  • Lease rate: A charge, similar to an interest rate, paid on a lease. Multiply this by 2400 to get your annual percentage rate (APR).
  • MSRP: Vehicle sticker price.
  • Residual value: Estimated value of the leased car after the contract ends.

Set a budget for the total cost of leasing

Before you set your heart on a specific vehicle, determine a budget that includes short and long-term costs. Plan for how you’re going to make the down payment and monthly lease payments, and include additional expenses your lessor may require, including:

  • Collision coverage: Covers the cost of damage from a collision with another car or object.
  • Comprehensive coverage: Helps cover repair costs from damage not caused by collision.
  • GAP insurance : Covers the gap between the depreciated value of your car and what you owe if it’s stolen or totaled.
  • TT&L fees: Tax, title, and license fees vary by state and locality.

Do your research

Now that you’re equipped to talk shop and have a budget, it’s time to find a car. You can lease any type of vehicle — from luxury sports cars to reliable minivans.

The U.S. News & World Report’s new car reviews are a good place to find a vehicle that checks your boxes. Plus, the more you know about what’s on the market (and how well they are or aren’t selling), the greater negotiating power you’ll have.

Review lease terms

When you’ve selected a car, carefully review the contract terms. Expect it to include the vocab above, like cap cost and money factor, plus the mileage cap (typically 10,000 to 12,000 per year), overage charges, and the length of the lease.

Lease contracts are hard to break (without hefty penalty fees), so be sure to fully understand monthly payment and late fees, overuse charges, and early-termination fees. Finally, review the purchase option agreement, which allows you to buy the car at the end of your lease, and associated costs.

Mistakes to Avoid When Leasing a Car

Not Negotiating

You can (and should) negotiate when leasing. But before you barter with the salesperson, know which parts of the agreement are and aren’t flexible.

Put your negotiation skills to the test for:

  • Capitalized cost — work to reduce it below the MSRP. The lower you negotiate it, the lower your monthly payment.
  • Trade-ins — you can trade in your current vehicle to lower monthly lease payments.
  • Buyback price — typically set in the contract.
  • Mileage cap and overuse charges — push for a higher mileage allowance or lower excess mileage charges.
  • Money factor — a strong credit score may help you lower this.

Skip the negotiations when it comes to:

  • Residual value — set by an independent organization.
  • Acquisition fees — costs associated with arranging a lease, and you may have the option to bundle these into your monthly payments or pay upfront.
  • Registration and taxes — determined by the state.
  • Disposition fee — dealer’s cost for putting your car back on the market post-lease.
  • Purchase option charge — a fee, typically a few hundred dollars, if you choose to buy your car at the end of the lease.

Getting the Wrong Car Insurance Coverage

Car insurance is mandatory, and you’re required to have liability insurance — but minimum requirements vary by state. Most lease agreements also require full collision and comprehensive coverage, and gap insurance.

Poor Car Maintenance

During your lease, keep the vehicle in good condition (regular oil changes, tire rotations, etc.) or you may be subject to excess wear-and-tear charges when you return it.

Car Overuse

If you exceed the mileage cap you’ll pay overage fees at a set rate (for example: $.40 for every mile you drive over your limit).

Leased and Ready to Go

You want to feel good about any vehicle decision — and being knowledgeable about your options is the key. By researching what you need to know about the leasing process and which mistakes to avoid, you’ve already taken the first step towards that goal. So, whether you decide to lease or purchase a car, you’re ready to enjoy the drive.

Explore your auto lease financing options with Ally SmartLease.

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