How Much Does It Cost To Lease A Car?

In 2023, the average monthly cost for a car lease is approximately $563. Elements such as negotiation strategies, the impact of sales tax, the significance of down payments, interest rates and lease fees have implications on how much a lease may cost. Whether it's navigating the fees or strategically evaluating down payment options, we’re here to help you understand the cost of leasing a car and how it might fit in with your other financial goals.

Financial Reasons To Consider Leasing A Car

Leasing a car makes sense when you prefer driving a new vehicle every few years, or are interested in a new car, but not quite ready for the long-term commitment of ownership yet. It's a practical choice for individuals who prioritize lower monthly payments and enjoy the flexibility of upgrading to the latest models regularly. There are numerous benefits to leasing a car which include, but are not limited to:

• Lower cost to drive off the lot
• Potentially lower monthly payments
• Maintenance covered by bumper-to-bumper warranty
• Possible incentives from the dealership or manufacturer
• More cars to choose from
• Don’t have to worry about reselling it

How Dealers Calculate Car Lease Payments

Typically, monthly payments are influenced by the vehicle's depreciation, the lease term and the interest rate. Readers can estimate their monthly payment by factoring in the negotiated price, the residual value (how much the car will be worth at the end of the lease), and the financing rate. As the lease term concludes, lessees face decisions such as returning the vehicle, purchasing it at the predetermined price, or exploring a new lease. Car dealerships may have stipulations in the lease agreement, such as wear and tear limits and mileage restrictions, which can impact the overall cost and final decisions at the end of the lease.

Vehicle Price

The vehicle price directly influences factors like depreciation and monthly lease payments. While the manufacturer's suggested retail price (MSRP) is the standard starting point, it's possible to negotiate a different starting price with the dealership. Negotiating a lower price, often referred to as the capitalized cost or "cap cost," can significantly impact the overall lease cost by reducing the depreciation amount factored into the lease. This negotiation process allows lessees to potentially secure more favorable lease terms, aligning the cost of the lease more closely with their budgetary preferences.

Down Payment

Leasing a vehicle typically entails a smaller down payment, lower monthly payments, and overall lower financial burden. A key advantage of opting for a higher down payment is the potential to significantly decrease your monthly payments and reduce the overall cost of the lease. Substantial down payments essentially prepay a larger portion of the vehicle's sale price, reducing your financial responsibilities in the coming months and spreading the remaining balance over the lease term. In contrast to auto loans, where down payments can vary widely, lease down payments are typically more modest, providing lessees with a more accessible entry point into vehicle possession.

Sales Tax

Sales tax rates is a percentage-based fee added to the cost of goods and services at the point of purchase. Sales taxes on cars can range anywhere from 0% – 8.25%, as they vary from state to state. Given this range, sales taxes along with other fees can substantially alter the overall cost of a lease. Higher sales taxes in one state may result in increased monthly payments, or require a larger down payment in comparison to a state with a lower sales tax rate. These factors emphasize the importance of considering your state's tax rates in budgeting for a lease.

Interest Rate Or Lease Fee

Analogous to an interest rate on a loan, the money factor is an associated charge integrated into lease costs by car dealerships or finance companies. Also known as a lease fee, the money factor accounts for taxes and residual value, and helps determine your monthly lease payments. This factor will take your credit score into consideration. Researching eligible interest rates before visiting a dealership can potentially lead to substantial savings. By exploring pre-approved financing options, you can gain a clearer understanding of the interest rates you qualify for based on your creditworthiness. While a dealer is not obligated to negotiate with you, arming yourself with this knowledge can help ensure you’re getting the best deal possible.

Money Factor Calculation

Interest rates are typically represented as decimals. To convert this decimal into a digestible figure, like an interest rate, simply multiply it by 2,400.

For example, if your money factor is 0.0025:

0.0025 x 2,400 = 6%

6% would be your approximated APR on the lease.

Residual Value

Residual value, or salvage value, is the anticipated worth of a leased vehicle at the end of its lease term and is closely tied to its depreciation. Car shoppers can estimate a vehicle's residual value by consulting with the leasing company or utilizing industry resources. Typically, a higher residual value corresponds to lower depreciation costs, potentially leading to more favorable lease terms, including reduced monthly payments. Consumers can strategically negotiate lease agreements, leveraging this information to secure more favorable terms that align with their financial preferences.

Depreciation Fee

Dealerships or lenders calculate the depreciation fee for a leased vehicle by subtracting the estimated residual value from the total cost and then dividing this result by the lifespan/lease of the asset.

For example, if a car costs $30,000, has a useful life of 5 years (60 months), and an estimated residual value of $5,000, the monthly depreciation = ($30,000 - $5,000) / 60 months = $416.67 per month.

Lease Term

A lease term refers to the agreed-upon duration for which you can drive a leased vehicle, typically ranging from 2 to 5 years and measured in months (for example, a 36-month lease). The length of the lease term significantly impacts monthly payments and overall lease cost. Monthly payments are determined by the car's projected depreciation value during the lease term. Shorter lease terms, such as 2 – 3 years, align with common industry practices and often coincide with the vehicle warranty period, providing benefits like reduced out-of-pocket repair risks. At the lease's conclusion, the vehicle is returned, and its condition is assessed.

At A Glance: The Cost Of Leasing A Car

The following chart contains a price breakdown of the cost of leasing a car with an MSRP of $47,899, which is the average price of a new car as of September 2023. The chart utilizes average prices, percentages, and terms commonly observed on car leases in 2023. 

FAQs: Car Leasing Costs

The following are answered FAQ’s regarding car leasing costs.

Is it cheaper to lease or finance a car?

Whether it's cheaper to lease or finance a car depends on individual circumstances and priorities. Leasing often offers lower monthly payments and the opportunity to drive a new vehicle more frequently, but financing may be cost-effective in the long run. It's essential to consider factors like budget, driving habits, and long-term ownership goals when deciding between leasing and financing.

Does leasing a car hurt your credit?

Leasing a car can have a positive impact on your credit, like an auto loan, as the lease agreement is reported to credit bureaus. Timely payments contribute to building a positive credit history, potentially benefitting your overall credit score. However, missing payments or defaulting on the lease can have adverse effects, negatively impacting your credit for up to seven years.

Is leasing a car like renting a car?

Leasing a car is similar to renting a car in the sense that both involve paying for the use of the vehicle without owning it outright. However, there are key differences. Leasing typically involves a longer-term commitment, often lasting several years, and comes with mileage restrictions and the option to buy the car at the end of the lease, while renting is usually a shorter-term arrangement without the option to purchase the vehicle.

How much should I save before leasing a car?

Before leasing a car, it's advisable to save for upfront costs, such as the down payment, security deposit, taxes and fees. A common recommendation is to aim for a down payment of around 20% of the vehicle's purchase price to potentially secure more favorable lease terms. Additionally, having an emergency fund equivalent to a few months' lease payments can provide a financial safety net during the lease term.

Can I buy the car I leased when the lease is up?

At the end of your lease term, you typically have the option to buy the car. This process, known as a lease buyout, allows you to purchase the vehicle at a predetermined price specified in your lease agreement, often based on its residual value. It's an opportunity for lessees who have grown attached to the vehicle or find it advantageous to keep the car for the long term. The buyout price can be influenced by factors such as market conditions and the car's overall condition.

The Bottom Line: Check The Details To Understand The Cost Of Leasing A Car

Understanding elements like negotiation tactics, sales tax considerations, and strategic down payments empowers consumers to make informed leasing decisions aligned with their budgets. With potentially lower monthly payments and considerations for interest rates, leasing can be an attractive option for budget-conscious individuals. In navigating the world of new cars with financial finesse, leasing offers personalized choices. To enhance your financial journey, consider downloading the Rocket Money℠ app for valuable insights and assistance.