Financial Literacy for Everyone

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Instead of buying a new or used car, another option is to lease a new car for monthly payments. A lease is a contract in which a new car is loaned to you for a specified time period, ranging from six months to five years. If you want to have a new car every few years, then leasing might be the way to go; however, it may cost more than purchasing a car in the long run. Vehicles can be leased from a dealership. After successfully negotiating a deal, signing a contract and making a down payment, you will commit to a monthly payment that will cover the cost of the car’s depreciation.

buying a home

Your monthly lease payment is determined by five important numbers:

  • Lease Term – How long you’ll be leasing the car.
  • Lease Residual Value – An assumption of what the vehicle will be worth at the end of the lease term.
  • Money Factor or Lease Fee – An alternative way to express the amount of interest on a car lease. Money factor x 2,400 = annual percentage rate (APR).
  • Miles Driven Per Year – The average number of miles you expect to drive each year during the lease term.
  • Acquisition Fee – A fee to cover a leasing company’s administrative costs.

Leasing can sound like a fun way to experience a variety of cars, but be aware that leasing contracts come with many conditions. Some examples:

  • If you buy the car that you leased, the cost of the lease combined with the purchase price of the car is often much more than the price of the car when it’s new.
  • Deciding you want to end a lease early means you'll have to pay the remainder of the lease plus any termination fees.
  • Any wear and tear on the car, including scratches and dings, means you’ll have to pay to fix anything that decreases the resale value of the car.
  • If your mileage surpasses the limit that you agreed to, then you’ll have to pay a specified amount for each mile that is over the limit.
  • Customizing vehicles in any way will mean you have to pay an additional fee for making modifications at the end of the lease.
  • You’ll want to read your lease contract thoroughly to avoid any surprises later.

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