Car Loans

How Does Leasing a Car Work?

By TheCarzingTeam May 18, 2022 | Car Loans

Car Loans

The choices for a new car can be overwhelming. Deciding on the ideal model isn’t always an easy decision, but another major dilemma could complicate the process, too. For new models, dealerships might offer two options: leasing and buying.

Car shoppers might be eyeing the lower prices of leased automobiles. Is leasing a car a better option than buying? How does leasing work? When shopping for a new vehicle, there are four major factors that differentiate leasing from buying:

  • Price
  • Ownership
  • Maintenance
  • Driving restrictions

How Does Leasing a Car Work

Buying vs. Leasing

When buyers are considering either leasing or buying a vehicle, they need to understand the major differences between these two contractual agreements.

The major difference between leasing and buying a car is focused on ownership. When buying a vehicle, the consumer will either pay for the vehicle out of pocket or apply for financing (i.e. a loan). In both cases, the buyer is considered an owner.

While a bank might have a legal right to the vehicle when they provide financing in the form of a lien, the financial agreement between the lender and the buyer stipulates that when the loan is paid in full, the buyer becomes the sole owner.

A lease works differently. When the consumer leases a vehicle, they are basically renting the car on a long-term basis. For a monthly lease payment, the buyer can drive the car. A lease is a short-term arrangement, typically three years.

When the lease ends, the consumer returns the vehicle to the dealership. The individual leasing the car doesn’t have an ownership of the vehicle (although they could elect to buy the car after the lease expires). Again, consumers should think of this as a long-term rental agreement.

The Benefits of Leasing

While the consumer might not be the owner of the vehicle, leasing is appealing to consumers for a number of reasons. For car shoppers who want to drive luxury automobiles, leasing the vehicle is often cheaper than buying the car.

Consumer Reports also explains that buyers have access to their leased vehicle during the vehicle’s prime years. A lease option is provided on newer vehicles, and, again, the lease expires after a few years. This means that drivers who lease are in the newest vehicles on the market.

In addition, the site explains that, as leasing is cheaper, buyers also can opt for newer vehicles that could offer better features. Basically, consumers who lease might get more bang for their buck.

Those who lease their vehicles also don’t need to worry about typical maintenance issues like oil changes. The dealerships that offered the lease will handle these routine visits. For those who don’t want to deal with those details, leasing could be an easier and hassle-free option.

The Downsides of Leasing

Car shoppers who choose to lease a new model might pay less for that vehicle per month. However, those payments aren’t going toward any type of ownership. Instead, the consumer is paying a price to drive the car.

While drivers don’t need to pay for routine maintenance issues related to their vehicle, they are on the hook if they get into an accident. Repairs related to fender benders and major accidents are the driver’s responsibility.

Leasing cars consistently might provide lower monthly payments, but those payments will never end. Consumers who elect to lease will always pay a monthly payment to drive their car. However, car buyers will eventually pay off their vehicle and own the car outright.

Car shoppers who lease their car also face another major downside: driving limitations. Leasing a car might be cheaper and convenient options for those who don’t want to handle routine maintenance, but leases include mileage restrictions. Bankrate explains that a lease could limit the driver to 10,000, 12,000 or 15,000 miles per year.

Taking a leased car on a cross-country road trip could lead to the driver exceeding that yearly limit. For every mile over the limit, extra charges are added. For an odometer that’s racked up several thousand miles over the contractual allotment, there could be some hefty charges for the driver.

For drivers who might accrue more miles on their odometer than the average driver, reviewing the mileage restrictions on a lease contract might help them decide whether or not leasing is the best option.

Gapping the Coverage for Leased Cars

Holding car insurance on an automobile is part of being a car owner and a licensed driver. In most states, auto insurance is a legal responsibility. However, what buyers don’t know is that their current policy might not be enough coverage when driving a leased car.

Lease payments typically cover the cost of depreciation of a vehicle; those payments are not allocating any principle. Remember, a lease is more aligned with a long-term rental. If a driver totals a leased car, their insurance company will pay the market value of the car.

Unfortunately, the purchase value of the vehicle in the lease contract might be more than the insurance company’s payment. This is due to the fact that a car depreciates when it drives off the lot. To ensure that the driver is fully covered, Bankrate recommends Guaranteed Asset Protection (GAP) coverage.

With GAP coverage, if the car is totaled and the consumer owes more than the settlement from the insurance company, GAP coverage could help cover the difference. Kelley Blue Book (KBB) explains that GAP coverage also could pay the collision/comprehensive deductible, too.  

Can Buyers Ever Own a Leased Car?

While leasing a car is different from buying a car, a consumer who leases their vehicle could opt to buy the car when the lease ends. The consumer would then need to either purchase the car outright or secure financing for the vehicle.

For those who don’t want to buy their leased car, though, a lease is a convenient option in that the driver can simply return the vehicle. At that point, they can elect to lease another new vehicle. Some consumers might elect to only lease their vehicles. They might like that leasing allows them to drive a better vehicle for a lower price.

How Does Leasing a Car Work

Use Carzing to Find the Best Lease Options

Car shoppers who are interested in leasing a new car can use Carzing to explore all their options. Search for cars by make/model, price or body type. Carzing will show all the available vehicles. Shoppers can refine their results by selecting ‘lease’ from the toolbar to the left of their search results.

Using Carzing, shoppers also can refine their results by selecting other must-have criteria, too. Shoppers can elect to choose certain car features like backup cameras, heated seats, sunroof/moonroof, etc. In addition, shoppers also can select specific paint colors for their car and specify the drivetrain, too.

For shoppers who decide that they would rather buy their vehicle than lease, Carzing also lets buyers get pre-qualified for financing. After entering some basic information, buyers will be able to review all their potential financing options. They can choose from different loan terms and monthly payments. Carzing also helps buyers understand how much money they will need for a down payment.

Buyers can print out a voucher with their financing details to present to a participating dealership. With Carzing, buyers can visit the dealership knowing the car they want and the financing they prefer. This means that the in-person dealership visit can focus on the important details of the transaction: completing the credit application, taking a test drive and finalizing the deal.

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