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Leasing a car: how it works and what to watch

The short version

  • Leasing means paying for the years you use the car, not for the car itself. The payment is lower than a loan payment — and at the end you own nothing.
  • The interest is hidden in a number called the money factor. Ask for it, and ask what it equals as a yearly rate, so you can compare it to a loan.
  • Leases come with mileage limits and wear-and-tear charges. Go over the miles or return it banged up, and the "cheap" lease gets expensive at the end.
  • The car's price is still negotiable in a lease — most people don't know that. Negotiate it exactly like a purchase.
  • Leasing tends to fit people who want a new car every few years, drive predictable miles, and treat cars gently. Drive a lot, keep cars a long time, or have kids and dogs? Buying usually wins.

What you're actually paying for

A car loses value as it ages. A lease charges you for the value the car loses while you have it, plus interest and fees. That's why the payment is lower than a loan payment for the same car — you're only buying a slice of it. The trade: when the lease ends, you hand back the keys and start over.

The four numbers that set your payment

  • The capitalized cost — the price of the car in the lease. Negotiate it down just like a purchase price. A lower "cap cost" means a lower payment.
  • The residual value — what the leasing company predicts the car will be worth at the end. Set by them, not negotiable, but it matters: a higher residual means a lower payment.
  • The money factor — the lease's interest rate in disguise, written as a small decimal. Ask the dealer to tell you what it equals as an annual percentage rate so you can compare it to a loan.
  • The term and mileage allowance — how long, and how many miles per year before per-mile charges kick in.

Where leases get expensive

Miles. Go over the allowance and you pay per mile at turn-in. Be honest about how much you drive before you sign, not after.

Wear and tear. "Normal" wear is free; beyond that, you're billed at the end. Dents, cracked glass, worn tires, stained seats.

Ending early. Getting out of a lease before it's over is one of the most expensive moves in car ownership. If your life might change mid-lease — a move, a new job, a new kid — weigh that now.

Turn-in fees. Many leases charge a disposition fee at the end just for returning the car. It's in the contract; look for it.

The end of the lease: three doors

You can return it and walk away (pay any mileage/wear charges), buy it at the residual price written in your contract — sometimes a genuinely good deal if the car is worth more than that number — or lease something new. Check used-car prices against your buyout number before you decide; that comparison takes ten minutes and occasionally finds real money.

Lease or buy? The honest test

Leasing usually suits: predictable, moderate mileage; wanting a new car every two or three years; and business use where payments may have tax treatment (ask a tax pro). Buying usually suits: high mileage, keeping cars past the loan, rough duty (kids, pets, job sites), and anyone whose goal is years of no car payment — the cheapest miles you'll ever drive are in a paid-off car.

Decided to buy instead? Start with the full car-buying guide, then compare auto loans →
Sources to cite before publish: FTC (leasing a car), CFPB (auto leases). All lease terms vary by contract — readers should confirm against their own lease.
JM
Reviewed by AI and James Mills · Retired financial planner with Professional Designations, 25-year career · Last reviewed: July 12, 2026