The Truth About Car Leasing

According to Kelley Blue Book, the price for a new vehicle reached $50,325 at the end of 2025.¹ With these high costs, nearly 25% of consumers are turning to car leasing to have the benefit of a new vehicle without a loan.² However, the long-term costs outweigh the short-term benefits. Learn more about how car leasing works and why it is the most expensive way of driving a car.

What is car leasing?

A car lease is a contract allowing you to use a vehicle for an agreed term by paying a fixed monthly fee and an initial upfront payment. The person leasing, called the lessee, signs a contract with the dealership or leasing entity, called the lessor, for a term ranging from 24 to 48 months. The most common lease is 36 months, and after making monthly payments for three years, the lessee hands the keys back to the lessor. While some leases offer a purchase option, the lessee does not own the vehicle during the lease.

What are the car leasing terms?

Car leases use different terms than loans, and the following are key terms to understand:

• Capitalized or “cap” cost – the upfront costs start with the capitalized cost, or “cap” cost, which is the agreed value or lease price of the vehicle. The gross cap cost also includes tax, title, license, and fees.
• Adjusted cap cost – you can reduce the gross cap cost with a down payment, rebate, or trade-in allowance, which are also called cap cost reductions. The cap cost minus the reductions is called the adjusted cap cost. 
  Important note about down payments: While they decrease the monthly payment, avoid making a down payment on a lease. Unlike a down payment on a vehicle purchase, the lessee does not gain ownership equity in the vehicle, so they lose this money if the car is stolen or totaled.
• Net capitalized cost – the cost calculated after subtracting all cap cost reductions from the gross cap cost.
• Residual value or depreciation charge – the expected depreciation and value at the end of the lease. Most vehicles have a residual value between 45-60% for a 36-month lease.³
• Money factor – the lease equivalent of an interest rate, also called the lease factor or lease fee. Manufacturers set the base rate for a vehicle, but dealers are not required to disclose the base amount and usually increase it to make a profit. Manufacturers display the money factor as a small decimal, which makes it difficult to compare to annual percentage rates (APRs) used for auto loans.
• Rent charge – the monthly charge to rent the vehicle is calculated by adding the adjusted cap cost with the residual value and then multiplying that total by the money factor.
• Excess mileage charge – most car leases limit annual mileage between 10,000 to 15,000 per year. If you exceed this limit, an extra fee is charged per mile, usually between $0.15 to $0.25 per mile. 

The monthly payment includes the rent charge and all fees in one lump sum, making it more difficult to know the money factor and compare costs to auto loans. The total due at signing typically includes the first monthly payment, taxes, registration, security deposits, acquisition, and other fees. 

What are the other costs of car leasing?

Besides the monthly payment, the lessee also pays for insurance, maintenance, and fuel. If you sign a car lease, you can expect to carry full coverage insurance as a core requirement. Always check your lease contract for the exact coverage limits and deductible caps before choosing a policy. The lease agreement outlines the maintenance intervals and typically follows the manufacturer’s standards. While the lessor may offer these services, it may be at an additional cost.

The lessee pays extra fees when they return the vehicle at the end of the lease contract. The disposition fee covers costs associated with closing out the lease. If the car lease ends before completion of all the required payments or terms, the lessee is terminating the lease early, triggering early termination charges and other potential fees. Lease agreements typically include a 15,000-mile annual limit, and they assess an extra charge for each mile driven over that amount. If the lessor thinks the vehicle is returned in worse condition than expected, they charge an additional fee for excess wear and tear.

Long-term costs of leasing

After paying tens of thousands of dollars to lease, the lessee has no equity to trade in for another vehicle. Leasing creates a cycle of always having a car payment because many sign on for another lease at the end of each contract. Purchasing a car with an auto loan or cash lowers your long-term expense as it avoids the trap of always having a car payment. Plus, you’ll have an asset when you pay off the loan that you can decide to keep, sell, or trade in for another vehicle.

The following charts⁴ compare the cost to own a $35,000 vehicle after a 36-month lease vs. a 60-month loan after 36 months. The total cost of the lease doesn’t include insurance, mileage fees, or other costs The loan chart also includes the equity you would have to trade-in after 36 months.

Why buying with cash is best

Buying your own car, either through an auto loan or with cash, secures ownership. If you don’t need a car immediately, it’s recommended to avoid monthly payments altogether by paying cash for your next vehicle. To make progress toward this goal, set up a separate savings account and calculate how much to save each month based on your timeline. Once you’ve saved enough to buy a car, negotiate the total price before mentioning that you’re paying in cash as a bargaining tool for a greater discount. After you buy your car, continue contributing to your savings account to budget for repairs and maintenance or for another car in the future. Factor in other costs that increase each year, like insurance and registration. Shop smarter by finding a reliable used vehicle that fits your budget in 4 Questions When Shopping for a Used Vehicle.

Bottom line: Car leasing can be one of the most expensive ways to drive over the long term because you continuously pay for vehicle depreciation without building ownership equity. New vehicles depreciate rapidly during the first few years, the same time frame as leases. The lessee is paying for the vehicle’s most significant loss in value while never gaining ownership.

If you’re looking to open a savings account to save up for a car, Texell offers savings and money market accounts to help you earn on deposits while saving. If you’re exploring auto loans, Texell consistently offers low rates on new, pre-owned, and refinanced auto loans.

If you wish to comment on this article or have an idea for a topic we should cover, we want to hear from you! Email us at editor@texell.org.