Ever wonder what the difference is between renting, buying and leasing a car? Want to know if leasing is a good idea?

We asked the Federal Reserve Board to help us with basic consumer questions regarding auto leases.

We know: All About Leasing a Car

What’s the difference between buying and leasing a car?

When you buy a new car, you usually take out a loan to pay for it. When the loan is paid off, the car is yours.

When you lease a new car, you make an agreement to use the car for a specified period of time, usually 2-4 years, in return for making lease payments. When the term of the lease is over, you return the car.

What do I pay for when I lease a car?

When you sign an agreement to lease a car, you usually pay the following up-front costs:

  • A refundable security deposit
  • The first month’s lease payment
  • A down payment
  • Taxes, registration and any other fees and charges

Are the monthly payments for leasing more or less than buying?

The monthly lease payment is usually less than what you would pay for a loan to buy a comparable car. This is because you are paying only for the vehicle’s depreciation during the term of the lease, plus rental charges, taxes and fees.

When you buy a car, the monthly payment is usually higher because you are paying for the entire purchase price of the car, plus interest and other finance charges, taxes and fees.

What happens when the lease period ends?

When your lease time is up, you return the vehicle and pay any end-of-lease costs and you’re done. You can walk away, or you can negotiate a finance plan to buy the car instead.

If you decide to end the lease early and return the car you are responsible to pay any early termination charges.

Are the limits on my use of the car when I lease it?

Usually, yes. There are often mileage limits (usually 12-15k per year) and you will probably have to pay charges if you exceed the mileage. You can also try to negotiate for a higher mileage limit.

There are also usually wear and tear limits. If you exceed those, you will probably have to pay an additional charge.

Can I negotiate any of the terms of the lease?

Absolutely. Here are some of the terms you should try to negotiate:

  1. the agreed-upon value of the vehicle: A lower value can reduce your monthly payment
  2. up-front payments, including the capitalized cost reduction (down payment The monthly lease payment
  3. amount of the monthly lease payment
  4. any end of lease fees and charges
  5. the mileage allowance and per mile charges for extra miles
  6. the option to purchase at lease end or earlier
  7. coverage on the vehicle, including gap coverage, which protects you if the vehicle is stolen or totaled in an accident

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