How does leasing a car work?

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Many people think leasing a car is the same thing as renting a car, just for the long term. In reality, the only similarity between renting a car and leasing one is that you don’t own the car you are driving.

With a car rental, you are paying a set price by the day or week in 24-hour increments. Generally, the price can’t be negotiated and the only way you can get a discounted rate is with a coupon or a corporate rate.

The price of leasing a car, on the other hand, is based on your credit score and can be negotiated. In addition, you pay a long list of fees upfront, just as you would if you were buying the car.

Let’s look at five factors of a car lease that make up your overall cost to lease a car.

1. The cost of the car

This is usually called the capitalized cost, or “cap cost.” It can be negotiated just as you would negotiate the sale price if you were buying.

2. Residual value

This price is the car’s value at the end of the lease, which is listed on the lease contract. It can be negotiated, but if you are leasing the car on a leasing special set by the automaker you may not be able to negotiate this amount.

3. Interest rate

Since a car lease is technically a type of auto loan, there’s an interest rate, which is called the “lease factor.” Like a low interest rate, the lower the lease factor, the lower your monthly payment.

4. Due-at-signing fees

Expect to pay all the fees you’d pay when buying a car, including title, registration, dealer document and prep fees as well as a portion (sometimes all, depending on the state) of the tax associated with the value of the car.

Some leases also require an acquisition fee, which is an administrative fee to arrange the lease and a down payment. All of these fees, except for those required by state and local officials, can be negotiated.

5. End-of-lease fees

Some leases have a fee that is required at the end of the lease called a “disposition fee,” which can be negotiated. In addition, you will be charged for any wear-and-tear deemed to be excessive, such as door dings, scratches or other cosmetic issues.

Other things to know

Before you sign on the dotted line, make sure you know the terms of the lease. Most leases are for 36 months, but some leases can be as short as 24 months and as long as 60 months. In addition, every lease has a mileage limit (typically 12,000 miles, but it can be as little as 7,500) and there is a per-mile penalty for logging more miles than the contract allows. If you think you’ll need more miles, negotiate that upfront before you sign the contract.