How to lease a car

Smiling young couple looking for a new car to buy at car showroom.Image: Smiling young couple looking for a new car to buy at car showroom.

In a Nutshell

When you lease a car, you get to give the car back at the end of the lease and look for a different car to drive, if you want. But a lease also comes with a number of obligations that are different from your responsibilities when buying a new car, so make sure to arm yourself with knowledge about the terms, rules and potential fees.
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Leasing is fundamentally different from buying a new car.

Unlike financing to own a car, leasing a car allows you to drive a new vehicle for a period of time — often two to four years — and for a monthly payment that’s typically less than a finance payment.

Once your car lease is up, you may have different options depending on your lease agreement. The only option may be to return the car — but some lease terms include a purchase option.

There are a number of steps you’ll need to take before leasing a car, and several financial and legal terms you’ll want to understand. Follow this guide to learn how to lease a car.

Step 1: Do your research and learn car-leasing terminology

Car leases can be considered a low-commitment alternative to vehicle ownership. But car leases do come with many terms and conditions.

Most leases limit the number of miles you can drive and will charge you for overages or any notable damage when you return the vehicle. And returning your leased car early can be costly, too.

While you’re determining if leasing is right for you, you’ll also want to check your credit since you may need healthy credit to lease a vehicle. According to Experian, leasing companies typically look for FICO® scores of 700 or better (on a scale with a range between 300 and 850), which FICO® regards as a good credit score.

If you know that leasing could be right for you after researching the requirements that come with leasing a car, make sure to arm yourself with common leasing terminology you’ll likely encounter during your search.

  • Lessor/lessee: The lessor is the company that grants you the lease, usually the vehicle manufacturer or auto dealer. The lessee is you — the person who is leasing the vehicle.
  • Co-signer: The person who may act as a second guarantor on your lease so that you can qualify for the lease or for potentially better lease terms.
  • Residual value: When your lease begins, your lessor will determine a future value for the vehicle, which is also known as the residual value. This will help determine your monthly payment. A higher residual value means the lessor expects less depreciation during your lease — often indicating the vehicle will retain its value better.
  • Rent charge: This is the main cost of leasing a car, and is paid each month in addition to vehicle depreciation. This is similar to interest. Some other components of your monthly payment may include car loan amortization, sales or use tax and any miscellaneous fees.
  • Disposition fee: If you return the vehicle at the end of your lease, you may have to pay a lease disposition fee, which helps the lessor prepare to sell the vehicle and can cover costs like vehicle cleaning, storage fees, administrative costs and more.
  • Purchase-option opportunity: This refers to your option to buy the vehicle after your lease is complete. Typically, the lease will either state the purchase price from the outset in your contract or in a specified used-car handbook.

Step 2: Set a budget

Next, you’ll want to calculate how much car you can afford to determine how much you can spend on a monthly lease payment.

It’s also important to figure out how much money you have available for any down payment and any extra fees you might be responsible for at the time you lease a car.

Here are some fees and insurance options to consider.

Wear-and-tear coverage

If you’re a frequent driver who anticipates putting a lot of wear and tear on a car, opting into wear-and-tear coverage might be a good investment for you. You can easily pay for this coverage upfront, and then you won’t be charged for certain wear-and-tear damage at the end of your lease — within limits. Check with your leasing company to see what this protection would include on your lease — some companies cover up to $5,000 worth of end-of-lease charges. If this option sounds appealing, make sure to factor this into your pricing and budget.

Comprehensive and collision insurance

When you lease a car, you might have to buy additional, specific types of car insurance coverage if you don’t already have it. Comprehensive insurance may cover the cost of repairing or replacing your vehicle in the event of an incident, including theft, fire or other acts of nature.

Collision coverage is similar to comprehensive coverage, but it’s aimed at covering costs for repairing or replacing your car if it’s damaged in an accident with another vehicle or object.

Gap insurance

Many lessors will also require you to have gap insurance. This may be included as a cost in your lease agreement or you may have to pay for it separately — it will vary based on your lessor.

This is insurance coverage that fills the gap when the early termination payoff (excluding past-due amounts) exceeds the insured value of a totaled or stolen car.

Step 3: Narrow your car search and visit a dealer

With this information in hand, you can visit a car dealership and see what options fall within your price range.

You should shop for a car to lease as if you were buying it. Many of the same rules apply — take it for a test drive, consider the pros and cons, and find a vehicle you’re willing to commit to for the next few years.

You might find that not every car is available for leasing. Since leased cars are usually sold again, dealerships generally put their most popular makes and models up for lease. If you want a specific model or certain features, you might not be able to get it by leasing.

Sometimes automakers offer leasing specials, so it may help to shop around for lease deals online or visit your local dealership to see what’s available while you’re in the market.

Step 4: Negotiate your lease terms

You may think you can only negotiate when you’re buying a vehicle, but that’s simply not true. When lease shopping, terms like the mileage, cost of the vehicle and interest rate on the lease can all be negotiated.

This could help you get a lease contract that works better for your needs and budget.

Once you’ve selected your preferred vehicle and come to an agreement on the terms of your lease, it’s time to fill out the paperwork. If you’re approved, you’ll receive a contract that formalizes the agreement between you and the leasing company, and it will outline your use of the vehicle and your obligations. This is your lease agreement.

As you review your lease agreement, you’ll want to note your monthly payment, the amount due at signing, what maintenance you’ll be responsible for (and who pays for it), mileage limits, and any fees due, like the disposition fee and acquisition fee.

You should also confirm if your lease is a closed-end lease or an open-end lease. With a closed-end lease, when you return the car, you’re done — you generally don’t pay any additional amount unless there is excessive mileage or wear on the car, and you can just walk away.

With an open-end lease, you and the lessor agree at the start of the lease what you think the car will be worth at the end of the lease (its residual value). Then, when the lease ends, you have to pay any difference between its residual value and its “realized,” or market, value.

Always read the fine print of your lease agreement to ensure you don’t miss any important details.

Step 5: Take care of your car

Once you’ve signed your lease and driven off the lot, you should take good care of your car. Remember, you could be responsible for any and all damages during your lease term.

Getting extra covering and protection for the floors and seats of your newly leased car may not be a bad idea. You’ll want to keep your leased vehicle looking its best to avoid additional fees.

You’ll also have to keep up with routine maintenance. If you don’t, it could cost you at the end of your lease. While that oil change might be inconvenient, you’ll want to take care of the vehicle.

The good news? Some car leasing agreements include maintenance, so you won’t have to pay extra for it.

If at all possible, keep your vehicle for the whole term of your lease. If you terminate your car lease early, you may have to pay an early termination charge, which is typically the difference between the lease payoff amount and the value of the vehicle. That charge can be several thousand dollars.

Step 6: Understand your options for turning in your car or keeping it 

Once the end of your lease term approaches, you’ll want to understand what your options may be: returning your vehicle, buying your leased car (if allowed in your contract), getting another leased vehicle or buying a different car altogether.

Follow this timeline to help guide your decision.

Two to three months before your lease ends

Depending on the terms of your lease, you may have several options when it ends, including buying it outright to keep the car or getting a new vehicle. You may also have the option of extending your lease.

Now is a great time to reevaluate your budget and take a look at what’s on the market and what kind of deals may be available to you.

If you’re considering buying the car after your lease ends, you’ll need to know the purchase-option price of the vehicle. This is typically either stated as a fixed dollar amount in your lease agreement or will be determined by the vehicle’s fair market value in a used-car guidebook.

You’ll also need to schedule a lease-end inspection. There may be some variation in this process, depending on the lessor, but this will typically be 60 to 90 days before your lease’s end and will determine if you need to make any repairs to your vehicle before returning it.

You should also take care of any repairs or maintenance you may need, like windshield repair or new tires. It’s also worth checking to ensure that you have everything that came with the car, including both sets of keys, all floor mats, a spare tire or charging equipment.

Many manufacturers have online leasing checklists that detail your return timeline and what’s involved in the vehicle inspection, including what’s considered normal versus excessive wear and tear.

If you’re thinking about buying out your lease, two to three months before your lease’s end is a good time to talk to your lessor about that process.

One month before your lease ends

Now’s the time to schedule your inspection, if it hasn’t taken place already, and find a time and date to return your leased vehicle.

If you want to buy out your lease, this is the time to start shopping for auto loans. That way you can aim to get your financing in order, and you can make your car-buying experience a smooth transition.

The day before your lease ends

It may sound obvious, but don’t forget your important personal items in the car. Things like garage door openers, toll transmitters and parking permits are easily forgotten.

It also won’t hurt to give your car a good wash and vacuum, wipe down the interior and spot treat any small stains. Go into the final inspection with your car looking its best.

Day of your lease return

This is when you’ll drop off your car for good if that’s the decision you’ve made. Don’t forget to take along your spare key as you part ways with the vehicle.

Verify with your lessor that everything is settled. You may have to sign documents like an odometer disclosure statement. Make sure all the terms of your lease agreement have been satisfied.

If you’re leasing a new vehicle, you’ll start this process all over again with the same lender or a different lender.

Bottom line

While car lessors may have different ways of handling leases, returns and charges, there are common elements. Becoming informed about how lease agreements work is a key first step in being able to walk away from your lease satisfied when it ends.

About the author: Liz Knueven is a personal finance writer with a BFA in writing from Savannah College of Art and Design. Liz has been published by Business Insider, and LendingTree. Read more.