Helpful Car Lease Questions: What Do I Need to Know About Lease Agreements?

Thinking about leasing a car? Find out what you need to know before signing the lease agreement.

Leasing a car is a common way to get access to a newer vehicle without the hassle of car ownership. These vehicles start as brand new cars, and companies own them outright or finance them as the lessor. When you sign up for a lease agreement, the use of the vehicle for the term of the lease is extended to you as the lessee and driver. This gives you access to what is practically a brand new car!

Leasing is a good option to consider if you are looking for rotating access to the latest makes and models of vehicles on a continuous basis. If you don't like the vehicle, you can simply get a different lease within a few years and switch it up. Leases are also handy for maintaining a pool of business vehicles with less maintenance hassle while keeping assets off of the accounting books.

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Leasing Table of Contents
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    How Leasing Works

    You pay a monthly lease fee to the finance company to use the vehicle as you would your own car. The car's maintenance routine and standard service schedule are maintained as part of the lease agreement and leased cars normally have a factory warranty to help cover any additional repairs. As a lessee, you are normally responsible for the vehicle with a few notes concerning mileage and condition.

    The annual mileage you drive each year is usually limited based on your lease contract or agreement conditions. It is usually around 12,000 miles with additional miles available for an extra fee. You must also return the vehicle at the end of the lease without damage or you face paying additional fees to fix the damage. You can also potentially buy out the lease at the end of the agreement and finance the car then as well.

    Helpful Car Lease Questions: What Do I Need to Know About Lease Agreements?

    Car Leasing FAQs

    Leasing a car can be a better choice than buying in some circumstances. Learn about leases.

    No, you do not own a leased car. Leases are financed vehicles, and the company or car dealership you are financing it through usually owns the leased car. You are however entitled to use the vehicle as if you owned it. Remember you are responsible for the vehicle and its condition. At the end of your lease’s term, you must return it in good condition. You can find the exact details surrounding the conditions in your lease agreement.

    The finance company usually pays the personal property tax on a leased car. Because you are the lessee, the cost of the tax is normally included in your lease fees. In situations where the company does not pay the tax, you may have to pay it.

    Parking violations are paid by the lessee one way or another. The same goes for radar monitored speeding tickets, red light cameras, and other automated traffic control violation devices. The violations can be sent either to the lessee or lessor. It can depend on factors like whether the ticket was served in person on the vehicle or if it was sent to the address on record associated with the license plate and other factors. Sometimes overdue parking violation notices can be sent directly to the finance company. In these cases, they may pay the fine and send you a surcharge plus a processing fee.

    Leasing can be cheaper than buying a car in certain situations. If you are planning to buy the car at the end of the lease with a lease buy out, then it's usually not cheaper. Leasing a car affords you lower monthly car payments than if you chose to buy that same car. However, if you choose to finance your residual value, or balloon payment, at the end of your lease term, you will most likely pay more than if you had chosen to buy the car in the first place.

    Leasing can be a good choice in certain situations. Finding out if it is right for you depends on thinking about the following things.

    When it comes to leasing a car:

    • Do you like to drive newer cars that are under factory warranties?
    • Do you typically trade in your car every 2 to 4 years?
    • Do you drive less than 12,000 to 15,000 miles a year?
    • Are you more concerned about lower monthly payments than owning a car?

    If you answered “yes” to most or all of the above questions, then leasing may be right for you. When you lease a car, it is typically under factory warranty or partial warranty for the entire term of your lease. Most lease terms run 2 to 4 years after which you will return the car. You won’t owe anything extra except for any fees covering damages to the condition of the car.

    Most leased cars have mileage restrictions set around 12,000 to 15,000 miles per year. If you drive at or below this range yearly, then you should not have to worry about any mileage overage charges. Also, if you trade-in your car every 2 to 4 years, then you probably are breaking even anyway on the lease payment versus financed car payment. You would most likely be better off leasing the car and having a significantly lower monthly payment.

    You can also set your lease up may even lease with all intentions of buying at the end of the lease. This affords you lower monthly payments during the beginning of your loan. You may pay a little more in the long run, but you may not be able to afford to buy the car outright.

    Buying is the next choice to consider versus leasing. Buying can be a good choice in certain situations. Finding out if owning your car is right for you depends on thinking about the following things.

    When it comes to buying a car:

    • Do you plan to keep your vehicle longer than 4 years?
    • Do you drive more than 15,000 miles a year?
    • Are you interested in building equity in your vehicle?
    • Can you afford to finance a vehicle?
    • Are you in a nonprime (601-660), prime (661-780), or super-prime (781-850) credit score bracket?

    If you answered “yes” to most or all of the above questions then buying a car may be right for you. As the owner of the vehicle, you can keep it for as long as you want or until you decide to sell it. You can also drive as many miles as you want each year without paying any of the mileage overage fees lease usage is constrained by. Newer vehicles may also be under factory warranty as well or you can always add a vehicle service contract onto your auto loan.

    Leasing cars is a popular option for business. These leases are normally used as company or commercial vehicles. This is because most businesses can write off the lease as a business expense without having to claim those cars as company assets. Different business formations including corporations(C and S types), sole proprietorships, limited liability companies (LLC), and private limited companies.

    This strategic use of leases has a large benefit when filing taxes. Additionally, the leased cars will usually have a lot of miles put on it which may be up to or over the lease’s mileage restriction and be swapped out for newer fleet vehicles every few years. That way companies can maintain pools of newer, dependable cars that are most likely under warranty or extended warranty.

    When leasing a car, you will most likely encounter the same costs and fees as if you were purchasing the vehicle. Such fees may include the first month's lease payment, taxes, title fees, DMV registration and/or tags costs, and a security deposit. You can also prepay an amount toward the total lease value to lower your monthly car payments.

    Yes, leases can be returned early before the lease term is up. You can return the car, but there is usually an early termination fee that you will have to pay. These fees are usually significant enough to discourage customers from doing this. The cost usually varies depending on the remaining lease term. The longer the remaining term, the higher the termination fee.

    It depends on the type of damage. Normal wear and tear from using the vehicle is expected.Your lease agreement will typically outline the return condition that the car is expected to be in once the lease term is up. You will find the acceptable wear and tear provision in this section.

    You may have to pay for damages created by collisions from other cars, animals, or stationary objects. Repairs for these damages are normally covered by your car insurance policy, so you may not have to pay for them yourself. Keep in mind you may have to pay for any damage or situation where damage occurs which is not covered by the policy.

    You will also have to pay for minor interior and exterior damage. This includes upholstery stains along with nicks, chips, and scratches in the exterior paint and dents in body work. Wear to tires is also not normally covered. Most lessees have to replace the car tires during a lease to ensure the lease is returned with adequate tread. Leases with larger tires like SUVs and Trucks may have to have several sets of tires during their lease depending on how much you drive.

    Repairing a lease before returning can be a good idea. The leasing company, or lessor, will typically charge you far more money for the repairs than your insurance company would cover or than you could get it done for yourself. They may factor in additional service fees or even potentially estimate the amount it would cost to restore the car back to immaculate or perfect condition. If you get into a car accident, fix the damage through your insurance policy at an approved auto shop. Let the lease company know about the damage and that you are getting it fixed.

    Major damage like bent vehicle frames, partial destruction of the vehicle, or damages to a large percent of the vehicle should be repaired if possible before returning the lease is up. If the vehicle is a loss, work out the next steps between your insurance company and the finance company who owns the vehicle. The insurance company will normally pay out the market value of the vehicle. If this does not satisfy the lessor, you may have to pay the difference out of pocket.

    Most lease contracts and packages will allow lessees to drive between 10,000 to 15,000 annual miles. This is the total amount of miles that can be put on the car in one year. 12,000 is a common amount in lease contracts. This means that at 12,000 miles a year, you should have no more than 36,000 miles at the end of a 3 year lease. If you need to drive more than the mileage limit, you can but mileage overage fees apply. These fees will charge you an additional amount, like $0.15 USD to $0.30 USD, per every added mile.

    Mileage limits are set so a person can reasonably drive around locally during the lease. If you are driving longer distances or traveling for work, you may quickly hit the mileage limit. The lease agreement will allow for additional miles over the limit at an added cost. For example, your agreement will have a cost per mile overage charge you must pay. This charge usually ranges from $0.10 USD to $0.21 USD per mile.

    Here is an example of how an overage charge may work. If your limit is 36,000 miles and you drive 39,500 miles, you are over the limit by 3,500 miles. At a $0.15 USD per mile charge, you will have to pay around $525 USD in overage changes when you turn in the car.

    Be aware of the car’s mileage when you first sign the lease and record it on your paperwork. Make sure the recorded number of miles at the end of the lease is the difference between the original miles on the odometer and the ending number of miles. This will account for the miles you drove.

    The average driver in the United States drove 13,476 miles in one year in 2022 per the United States Department of Transportation Federal Highway Administration, or FHWA. This provides a good base line to figure out how many miles you may drive. You can figure out the exact mileage in a few ways.

    If you commute to work, calculate the number of working days in a year multiplied by how many times you drive to and from your home to work address. A full-time job will normally work around 260 days each year. You can find the mileage between addresses on Google Maps or using our gas mileage calculator’s trip distance feature. Add some leeway for other trips to the store and other places you visit.

    You can also use other years as a basis for your mileage count. If you have a previous car you normally drove, look at the maintenance records. Look for things like mileage between oil changes and other dated events. Estimate the mileage that you have put on the vehicle over that given time. If that is not possible, you can use the FHWA standard 13,476 approximation. If you think you drive less, you can scale your estimate down to 10,000 or 12,000 miles. If you think you drive more, bump up your estimate to 14,000 or 15,000.