How to Lease a Car

What You Need to Know About Leasing a Car

Many dealerships use their own in-house finance company.

The basic allure of leasing a car is that you don't have to pay for or finance the entire cost of a vehicle. You're simply paying for the use of that vehicle for a specific period, often two or three years or as long as five or six years. It's not exactly renting, but the principle is similar. Evaluating a lease is a matter of basic arithmetic. You need to consider four factors:

  • Total initial payment, including Capital Cost Reduction (down payment) and any extra fees
  • Amount of each monthly payment
  • Number of months in lease terms
  • Possible additional charges at the end of the lease

With a lease, your monthly payment is based on the difference between the vehicle's transaction price (its "capitalized cost") and what it's estimated to be worth at the end of the lease term (the "residual value"). This difference is financed at a particular rate of interest (which may be called a "lease rate," "lease charge," or "money factor").


Typically, your down payment and monthly charges will be lower with a leased vehicle than one purchased outright. That's why you can usually obtain a better vehicle for the same cash you put down. You might need nothing more to secure a lease than the first month's payment and a security deposit, which is usually about one monthly payment. Details vary sharply, though. Many lease deals require a substantial down payment and possible additional charges.

Nothing affects lease terms more than your credit score. The alluring terms seen on TV commercials are available only to customers with a top-notch credit history. So-so credit means a bigger down payment and/or higher monthly payments. Poor credit generally means no lease at all.

In any case, when the lease period is up, you simply return the vehicle to a dealer without having to worry about a trade-in or selling it to a private party. Provided that the vehicle is returned in good condition, you owe nothing more; but you own nothing, either. Most leases give you the option of purchasing the vehicle at the end of the contract at a predetermined price. If you really like the car, that's a possibility. However, this is often more expensive over time than buying it outright.

How To Shop Around for a Car Lease

Just as it pays to shop when you're buying a car, it's also wise to shop around for a lease. Make a few dealers compete for your business. One dealer might waive the down payment or cut the monthly payment to win your business. Others won't budge.

Make sure you compare costs for identical vehicles. A lease with low monthly payments and a hefty down payment might cost more overall than one with higher monthly payments but no money down. Do the math, and consider the total amount that you'll be paying -- both now and over the lease term.

Naturally, new-car dealers are a logical place to start your shopping, but there are alternatives. Leasing agents or brokers that lease several brands might beat the deal from the new-car franchise down the street. Some banks and credit unions also offer consumer leases.

If you lease from a dealer who uses an in-house finance company like Ford Credit or GMAC, at the end of the lease you generally can leave the car with any dealer who sells the same brand. This may not be the case if you lease from an agent or broker, or if a dealer uses an independent leasing company. Be sure to ask -- just to be prepared.

You'll also want to be prepared when it comes time to negotiate the lease. We'll provide some pointers on the next page.