How does leasing a car work?

Leasing a car means signing a contract to use a vehicle for a set period under specific conditions. Leasing has similarities to a long-term rental but is more involved. It's important to know your credit score and be prepared to negotiate lease terms and to read the contract carefully and look out for expensive add-ons.

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What is a car lease?

A car lease is a contract between you — the lessee — and the car owner — the lessor — to use a specific vehicle for a set period, under specific conditions. The lessor could be the automaker's financial division, a dealership, or a financial institution like a bank or credit union. Leases are comparable to long-term car rentals, wherein the lease limits how you can use the vehicle, including annual mileage and normal wear and tear. Leases are often three years, usually measured in months. Shorter leases last for one to two years. Some leases can be as long as six years.

Terms vary by the leasing company, the lessee's finances, and the vehicle itself, but a lease typically requires monthly payments and finance charges. The agreement specifies what happens when the lease ends, including whether you'll have an option to buy the car at that point. Learn about buying a leased car and the difference between a leased car and a rental.

How do you lease a car?

Start shopping around
Research vehicle types and models to find the one that fits your budget and needs
Take test drives at dealerships
Weigh the pros and cons of each car make and model

What are the requirements to lease a car?

The lessor typically requires a signed credit application with your name, contact information, and employment details. In order to lease a vehicle, bring the following:

Identification: You need a valid driver's license and, in some instances, proof of residency.
Proof of insurance: You must show proof of insurance with coverage that satisfies the lender's requirements.
Proof of income: You typically need proof of consistent income, such as a paystub, bank statement, or tax return, to qualify for a lease. The minimum income requirements vary based on the lender and vehicle's lease.

Tips for leasing a car

Know the total lease price
As you look around, ask prospective lessors for lease quotes that include the total out-of-pocket amount, including registration, taxes, and any down payment. Also, request quotes for the full monthly payment, including taxes. Read the terms closely to see where they differ and what they mean for the overall cost.
Budget for a down payment
Inquire about any initial payment required for the vehicle you're interested in. The lessor may require you to pay a substantial amount upfront. Factor this into the total lease cost, not just your monthly payments. Making a large down payment on a lease may not be advantageous and is sometimes negotiable or waived completely.
Understand your credit score
Before you begin the lease application process, it's important to know your credit score. If you have good credit, you're more likely to qualify for the lease and may have leverage to negotiate more favorable terms. Having a lower credit score doesn't necessarily mean you can't lease a car, but you may pay a higher interest rate or need a co-signer.
Be prepared to negotiate
You can try to negotiate just about everything in the terms of the lease, including the purchase price, the down payment, the interest rate, the monthly payments, the mileage limit, the value of your trade-in, if applicable, and fees.
Review all fees
Ask about any add-ons and extra charges that may apply and what they mean. Look over the entire contract closely before signing.
Understand lease terms
Get familiar with common lease terms and ask questions if you're unclear.

Pro tip:

Lease terms are often negotiable, including the initial payment, monthly payment, interest rate, and mileage limit.

How to lease a car online

Leasing a car through an online dealer or service involves the same initial steps as in-person leasing, but you complete the lease application process online. Look for a well-reviewed company. The lessor may ask you for a refundable deposit to start. Reputable online leasing companies offer a secure way to upload documents.

Once your paperwork is complete, the leased vehicle is delivered. The dealer or service may handle this for you, but it could be worth researching car shipping companies that offer a better deal if that's an option.

How does insurance work when leasing a car?

Nearly all lessors require comprehensive and collision coverage on a leased car, and some will require liability limits above your state's minimums. The state requirements for car insurance are the same whether you lease, finance, or own your car outright. Nearly every state requires liability coverage, including bodily injury liability and property damage liability. The lease company may also mandate gap coverage, also known as loan/lease payoff coverage.

Get more information about insurance requirements for a leased car.