Your Money, Your Future
Your Money, Your Future

How to avoid extra costs that can come with an auto lease

Key Points
  • Leases account for about a third of all new-car retail transactions, up from less than 20 percent in 2009.
  • The monthly payments on a lease averages $120 less than those of traditional auto loans, according to research.
  • The average price of a new car is at an all-time high of $35,444.

As both auto prices and interest rates tick upward, car shoppers might be tempted by the immediate appeal of a lease: lower monthly payments than if the car were purchased with a loan.

Yet before you commit, there are aspects of a lease to consider that go beyond the amount you shell out each month.

"All of this can be very complicated, especially when it's the first time you're looking at a lease," said Kimberly Palmer, personal finance expert for "It's good to know all the factors to consider."

A salesman talks to a person in a vehicle at a Fiat Chrysler Automobiles (FCA) car dealership in Moline, Illinois.
Daniel Acker | Bloomberg | Getty Images

Leases account for about one third (32.3 percent) of all new-car retail transactions, up from less than 20 percent in 2009, according to a 2017 study from online auto shopping and information site

The monthly payments on a lease averaged $120 less than those of traditional auto loans in 2016, the research showed. For large pickup trucks, which tend to retain more of their value than many vehicles, lease payments averaged $206 less than the average traditional loan payment.

Therein lies the lure.

Not only are higher interest rates pushing the cost of financing a car up — the average is 4.5 percent on a 60-month loan — the average price of a new car is higher than it's ever been: $35,444 in February, according to Kelley Blue Book.

While down 0.3 percent from January, it's 2.1 percent higher than the year-earlier average of $34,722.

"Leasing is a way to get more car for your money, especially with [prices] at a record high," said Ron Montoya, senior advice editor for

Yet, as with any transaction, buyers should make sure they understand the fine print and the aspects of the lease that could end up costing them more than intended.

And beyond financial considerations, it's important to be honest with yourself about what kind of car owner you are.

If your cars tend to encounter unfortunate events that result in dents, scratches, ripped upholstery and the like, a lease probably isn't right for you. Same goes for people who put a ton of miles on their cars.

The basics

In simple terms, a lease involves paying a monthly amount for the right to drive a car, for a certain amount of time, and returning it in decent shape and with reasonable mileage. Leases can be available on both new cars and used cars, depending on the manufacturer and dealership.

The amount you pay each month is generally based on the car's depreciation — the amount its value will drop during the life of your lease — plus any sales taxes and interest, and less any down payment you make. The total is divided by the number of months in your lease.

Be aware that the cost of financing a lease is expressed differently than it is with loans. Leasing companies use a number called the "money factor," and the math involved in converting that amount to an interest rate can be tricky.

Suffice it to say, as is the case with traditional auto loans, the better your credit score, the better financing rate you can snag for a lease. The dealership should be able to convert the so-called money factor into a interest rate so you know what you're paying.

Although lease agreements vary in length, experts say there are benefits to keeping it to three years or less.

Typically, new cars come with a warranty that lasts for three years or 36,000 miles, whichever comes first. If your lease comes with a 12,000-mile-per-year limit (a typical cap), the warranty would stretch the duration of your lease.

"If you don't like paying for repairs outside of a warranty, you generally don't have to deal with it if you have a three-year lease or shorter," Montoya said.

However, pushing beyond that 36,000 mileage warranty before your lease is up can do more than potentially cost you for repairs.

Expenses to avoid

You can expect to pay anywhere from 15 cents to 25 cents at the end of the lease for each mile over the limit you put on the car, Montoya said. At that rate, each 1,000 extra miles would cost somewhere between $150 and $250.

"If you think you might go over the mileage, you should try to structure the lease at the beginning to give you more miles," Montoya said. While it would boost your payments a bit, he said, the extra cost likely would be less than if you have to pony up when the lease ends.

Leases also come with fees if there is excessive wear and tear to the car upon its return. Montoya recommends asking the dealership exactly what that means, as it could vary among leases.

What to negotiate

Certain costs are not negotiable. Top of the list is the residual value of the car, which is its projected worth at the end of the lease.

However, even though you are not buying the car, its purchase price can be negotiable. And the lower the price of the car, the lower your lease payments will be.

Remember that you are paying for the difference between the purchase price and the residual value. So say the purchase price of the car starts at $25,000 and the non-negotiable residual value is $15,000. If you can get the purchase price down to, say, $24,000, the amount of depreciation that you're paying for is $9,000 instead of $10,000.

Certain fees on the lease also could be negotiable, so it's worth trying to bring those costs down.

Additionally, it's worth comparing prices among different dealerships.

"Shop around and make sure you're getting the best deal, because dealerships can vary in exactly what they're offering," Palmer said.

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