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The cost to lease a car varies based on the type of vehicle you choose and includes the vehicle’s estimated depreciation over the lease term, rent charges, taxes and fees.
A car lease is essentially a rental agreement between you and the leasing company that’s allowing you to use the car for an agreed number of miles and months.
Lease payments can be lower than car loan payments for the same make and model because you’re paying for depreciation instead of the full purchase price of the car. But leases can come with considerable fees, and you don’t own the car when the lease ends.
Before deciding whether 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 a car lease?
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 take out a loan to buy a vehicle, it’s easy to get an idea of what your monthly car payment will be: You add the amount you’re borrowing, add interest and then divide it by the number of months in the loan term.
When you lease a car, the payments aren’t based on the purchase price of the vehicle. They’re based on the residual value — how much it’s expected to be worth when the lease ends.
Monthly lease payments are calculated by adding the expected depreciation amount during your lease term (minus any down payment or trade-in), rent charge, sales taxes and fees and dividing the total by the number of months in the lease. For example, if the expected depreciation plus rent charge, taxes and fees totals $12,600 and the lease-term is 36 months, the monthly payment would be $350.
Car lease fees
If you lease a car, you’ll be responsible for paying multiple fees, which can drive up the cost of the lease. Some will be due when you sign the lease, and others will be due when you return the car at the end of the lease.
At the lease signing, some lessors may require you to make your first and sometimes last monthly payments as well as a security deposit that may be used if you default on the lease or to cover the cost of end-of-lease payments.
It’s also common for leasing companies to charge an acquisition fee, which helps offset the administrative costs of processing the lease agreement, such as pulling your credit reports and verifying your car insurance coverage.
In addition, you may have to pay title, registration and documentation fees, plus taxes depending on the state. Depending on where you live, you might be required to pay taxes at the lease signing, or you may be able to roll the taxes into your monthly payment. If you opt to add the tax bill to your monthly payment, you’ll pay additional rent charges on the taxes and your monthly payment will go up.
When you return the car at the end of the lease, there are several more fees you may have to pay.
- Excessive mileage: Most leases have mileage limits that are often around 12,000 to 15,000 miles per year. If you drive more than the number of miles allowed in your lease agreement, you’ll likely be charged a fee, which typically runs 10 to 25 cents per mile.
- Excessive wear and tear: Lease agreements typically include a definition about what is considered normal wear and tear for the vehicle. If you return the car in a condition that doesn’t meet these standards, you may be charged a fee. Examples include broken parts, damaged upholstery and cracked or broken windows.
- Disposition: The disposition 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 the lease early, you may be charged a fee.
In addition to the leasing fees, you might also be responsible for paying for routine maintenance and repairs just like you would if you’d bought the car. Plus, you’re typically required to maintain comprehensive, collision and liability auto insurance. Many lease agreements include gap insurance as part of your lease, and others offer it as an optional feature you can buy.
How much it costs to lease a car varies depending on the make and model, expected depreciation, interest charges, taxes and fees. Typically, monthly payments are lower on a lease than they are on a car loan.
If you’re debating whether to lease or buy, shop around to explore your options and determine which route makes financial sense for you.