ELI5-How do car leases work?

Question

I’m thinking about getting a leased car but I owe on my current car loan. How do I get a good deal on a lease? What are residuals? What are buy backs? How do you buy your car once the lease is over if you don’t give it back? I’ve only ever bought cars and never leased because I don’t know how they work and not get ripped off. I’ve Googled but I still don’t get it.

In: Other

Answer 1

So, leasing is basically financing the estimated depreciation over time. Example. You want a 2 year lease on a $30k car. The dealership estimates that the car will be worthy say $20k after two years (they drop quick at the beginning). Your lease then is basically $10k/24mo or ~$420/mo. They’re going to throw some finance charges or whatever in there so it’ll probably be more, but that’s close enough.

When your two years is up, you bring it back to the dealer. They assess the car and if there’s anything they don’t qualify as normal wear and tear (thus negatively affecting the price they’re about to get from reselling it), they’ll charge you extra. You will generally have the option to buy out the rest of the depreciated value if you’d like at that point. Things they’ll mark off for include but aren’t limited to: mileage (typically over 10k mi/yr though it varies), paint scratches, dents, stains, non normal wear, etc.

People will sometimes do leases if they always want something new. Cars being leased for 2 or 3 years will always be under warranty and they’ll never have to worry about getting new tires, failing inspections, defects, and some leases cover all maintenance costs.

On the flip side you’re always paying and at the end of the lease you turn in the car and walk away, so you paid for two years with nothing to show for it. If your someone like me who pays off a 5yr loan and then keeps the car for 10 more years, leasing is way more expensive. If your someone who likes having the newest car all the time, it’s a lot less hassle to lease than buy as long as you don’t go over their mileage limits and keep your cars clean and scratch free.

Edit: fwiw, a $30k car with no down payment and 60 month financing is $500/mo for a normal loan.