How Does Car Leasing Work?

Car or vehicle leasing means the use of a vehicle for a fixed duration for an agreed sum of money. It’s similar to renting except that it is for long-term use.  This scheme is usually offered as an alternative to the purchase of a new or used car. It is a practical option for businesses or those who need a car but don’t have plans of keeping it for a long time. Many companies such as offer car leasing for personal or business purposes.


The typical terms of car leases range from two to four years. This duration is generally longer than that of a rental car for a single payment. In the case of car rentals, you can keep using the car for more than two years, but you will be paying the rent on a daily, weekly, monthly, or quarterly basis. You will only be required to return the car after the term of the lease ends.

In some cases, the company offers the leased vehicle to the lessee for the residual value. If the lessee finds the car good enough to keep, the option to buy is a good opportunity to get a vehicle for a relatively low price. The time for which the vehicle was leased can be considered as an extended trial period. If the car has been running in good condition for a number of years, there’s no reason to doubt that it’s of good quality, hence worth taking.

Lease agreement

In leasing a car, it’s important to be familiar with the arrangements and conditions imposed. One of the most important details is the early termination fee, which is the amount you have to pay the lessor if you decide to cut off the lease agreement. It’s very rare to find companies that offer car leases without a pre-termination fee condition.

Another essential lease agreement condition is the allowable mileage. Generally, when it comes to passenger cars, the allocation is around 10,000 miles per year. It’s important to clarify this number as additional fees will be charged if you exceed this mileage limit.


The payment for the lease is not that straightforward. While there are companies that offer flat rates for certain conditions, the more common way to calculate payments is similar to how it is computed in loan payments. Instead of crunching numbers for an APR, though, the lessor uses something referred to as the “money factor”.

Also known as the lease rate or simply the “factor”, the money factor is equivalent to a monthly interest rate. The company uses a formula to compute for the final amount to pay as well as for the residual value in case the lessee decides to buy the vehicle at the end of the term.

Leasing a car can be a good alternative to buying a new or used one. It can be cheaper, and it provides the advantage of having been able to evaluate the condition of the vehicle for a long time. You just need to make sure that you understand how it works.