How a Lease Works

There are two types of leases: closed–end leases and open–end leases. Under the closed–end lease contract, sometimes called a "walkaway" lease, at the end of the lease term, you return the car and, unless there is excessive mileage or excessive wear on the car, you can generally just walk away without having to pay any additional amount. Your monthly payments may be higher under a closed–end lease than under an open–end lease because the leasing company takes the risk on the car's future worth – that is, that it will be worth its "estimated residual value" at the end of the term. Most advertised leases and those regularly offered at dealerships are closed–end leases.

Open–end leases are less available. Under an open–end lease contract you agree with the leasing company at the start of the lease what you both believe the car will be worth at the end of the lease. You agree to pay the difference between the realized value at the end of the lease and the estimated residual value. The realized value can be the price the leasing company receives for the vehicle when it's sold, the highest offer for the vehicle when it is sold, or the fair market value of the vehicle at the end of the lease. The realized value may be either the wholesale or the retail value as specified in the lease agreement. If the realized value is higher, the leasing company may refund some of your payments. If the realized value is lower, you will have to pay the difference.


Make sure you know if you have an open–end or closed–end lease. If you have an open–end leasemake sure you understand how much you may have to pay at the end of your lease.

Whether a closed–end lease, or an open–end lease, when you lease a car, you are paying for the use of the car. Cars usually decrease in value, as they age. This is called depreciation. When you lease, you pay for the decreased value of the car while you are driving it. You often also pay taxes, and other fees such as license, title and registration fees.

Several factors determine the amount of your monthly payments. One factor is the lease price of the car and the other amounts that are included in the lease. Just as when you buy a car and negotiate the purchase price, you may also negotiate the lease price. This is the price that you and the dealer determine is a fair value of the car, plus other amounts that may be included in the lease (for example, the first lease payment, security deposit, an acquisition fee, and title and registration fees). This price will usually be different than the purchase price. In the lease agreement, the lease price is called the gross capitalized cost or "cap cost. Another factor is the residual value. This is an estimate of the expected value of the car after you return it to the dealer or other location when your lease is over. Because cars lose value over time (depreciate), this amount will be lower than the lease price. The difference between the lease price and the residual value is the depreciation. The amount of depreciation will make up a large part of your payments. In an open–end lease, this is the value that will determine if you pay more at the end of the lease or if you receive a refund.

You will also pay a rent charge each month. This charge is similar to an interest payment that you would pay if you had purchased a car with a loan. With a lease, this is often called the money factor, but it is not calculated in the same manner as an interest payment. You will not see an APR in a lease.

You also pay sales or use tax, which is added to your payment, and property tax in those states that impose property tax on lease vehicles.

The leasing company may also require you to provide a security deposit that will usually be refunded to you at the end of the lease.

Finally, the leasing company may charge other fees which are added to your payment.