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Once you’ve found the car you want, you’ve got to think about how to pay for it.

Buying—whether you’re spending your own money or taking a loan, also known as financing—is the traditional way to get a car, but it isn’t the only way. You can also lease a car for a monthly fee. When the lease ends, usually after three or four years, you return the car to the lessor, or the company leasing you the vehicle.

Leasing has several appealing factors: You usually don’t have to put a lot of money down, your monthly payments are smaller than they would be with a loan, and you can change cars every few years.

On the other hand, you never own a car that you lease, so you can’t sell it or trade it in for a new one if you want. When the lease ends, you have to arrange another lease or buy a car. And, your insurance costs may be higher than they would be on a comparable car that you owned outright.


When you buy a car, you agree on a price with the dealer. Similarly, when you lease, you negotiate a price, called the capitalization cost. In most cases, that amount should be less— hopefully significantly less—than the manufacturer’s suggested retail price (MSRP).

Your monthly payment is what the lease costs each month, including sales tax. These payments remain the same for the term of the lease.

Once you’ve paid all of your monthly payments, what’s left is the car’s residual value. It’s figured as a percentage of the MSRP, based on how comparable cars depreciate in the time covered by the lease. If you want to buy the car when the lease ends, you’ll have to pay this amount regardless of what the car is actually worth at that point.

That cost is the main reason you should think twice about leasing if there’s any real possibility you’ll end up buying the car when the lease ends. It would almost always be cheaper to finance the purchase from the start.


You own your car when the loan is paid.

You can get full financing if you qualify.

You can take advantage of special promotions.

You have no mileage limits.


You may have to make a large down payment.

You owe sales tax on the purchase price up front.

You absorb the depreciation of the car.

After the warranty runs out, you are responsible for everything that could go wrong with the car.


You can get a new car every few years.

Your monthly payments are usually lower than loan payments.

You can get a more expensive car for less than it would cost to buy one.

Depreciation isn’t your problem unless you end up buying the car.


Residual value may be set artificially high to lower payments during the term of the lease, making purchase expensive.

You have set mileage limits.

You may be penalized for not keeping the car in perfect condition.

Your agreement with the lessor is hard to break.


You have to pay your first and last monthly payments and a security deposit up front on a lease. You may also have to make a down payment, or deposit. Also known as the capitalized cost reduction, that deposit lowers your monthly payments—but not the overall cost of the lease. 

There’s also an acquisition fee on top of your initial payment. The amount varies, based on the car you’re leasing and the lessor. It covers credit reports and other paperwork.

When you sign a lease, you agree to mileage limits—usually around 10,000 to 12,000 a year. You’ll have to pay 10 to 15 cents for every mile you drive over that limit.

Some leases also include a regular termination fee, which covers charges for wear and tear on the car and any excess mileage. And, finally, many dealers charge a disposition fee to pay for the costs of reselling the car after the lease is finished.


When you lease a car, you have to qualify for credit, just as you would if you were taking a loan. And you have to sign a lease agreement that spells out the terms and conditions. The more you know about how leases work, the better the deal you can arrange. For more information, check out  


If you want to get out of a car loan early—for example, if you want to pay off the entire amount before the end of the term—you may get hit with a prepayment penalty, which is a lump-sum charge on top of the outstanding principal. That’s because if you pay off what you owe before the term is up, you save money on interest but the lender loses that income.

It’s usually more difficult, and more expensive, to try to end a lease agreement early. In most cases, the penalty you have to pay will be substantial, sometimes the full amount remaining on the lease. The only way to avoid it is to roll over the lease on your current car to a lease on a newer or more expensive car from the same lessor.