How an Auto Leasing Service Works

3 Mins read

Leasing a car instead of buying it is a popular option these days.  Why?  It’s simple, the average price of a new car these days is unbelievable.  New car prices have risen over 29% since 2009.  Today the average cost of a new car is $38,000, according to the Kelly Blue Book.  

Not only is a new car prohibitively expensive, but financing it is also costly.  Interest rates for car financing have also risen at an incredible rate.

So today’s consumers are increasingly turning to auto leasing services as a way to afford a new car.

What is an Auto Leasing Service?

Sometimes people think that if they lease a new car, they are leasing it from the car dealer.  But that is not the case.  Leasing is often poorly understood by the average car buyer.

Basically, an auto leasing service is a company that leases cars. Leasing is the same as renting. It can be thought of as a long-term rental car. 

When a consumer leases a new car, the leasing company buys the vehicle from the dealership.  Then they rent the car to the consumer.  

However, the leasing company doesn’t just divide the purchase price into payments, and that’s it.  After the leasing company buys the car from the dealership, it draws up a motorist contract.

This contract tells all the details of how much the motorist will be paying each month.  They figure in the cost of the depreciation that will happen during the time the motorist will be driving the car.

What is Depreciation?

When consumers buy cars, they pay a specific price.  If they turn around and try to sell the same car after a year of using it, they will not be able to charge the same price they paid for the vehicle.  That loss of money is called depreciation.

Typically, a new car will lose about 20% of its original value during the first year.  After about five years go by, the car can lose 60% of its original value.  Different makes and models and brands lose money at different rates.  

So, the auto leasing company figures out how much the car will depreciate in value.  That number is figured into your payments.


Then, since the company is providing money to the dealership, they will need to charge interest on that money.  The motorist, of course, has to pay that interest.  So that is an additional number that will be figured into your payments.  

Taxes and Fees

Then there are the fees that car dealerships charge when they sell a vehicle.  Many of them are outright money grabs like destination fees, dealer prep fees, and advertising fees.  Many of the fees are legitimate, like paying for an extended warranty or a maintenance plan.

Also, every year the locality where the customer lives will charge personal property taxes on the car. There are also sales taxes to be paid when the leasing company buys the car.  

All of these fees and taxes are another number that has to be added to the leasing payment.

All in all, the monthly leasing payment that the motorist pays to the auto leasing service contains all the possible costs of owning the car without owning the car. 

What Happens at the End of the Lease?

So, when the motorist reaches the end of the rental period, what happens?  

There are two ways this can go.  The motorist either buys the car from the leasing company or simply gives the car back to the auto leasing service.

This is where the original rental lease comes into play.  Usually, the contract will tell the motorist how many miles he is allowed to drive each year.  If the motorist drives more than the allotted amount, he has to pay for the excess miles.  

Secondly, any damages that happened to the car must be paid by the motorist at the end of the lease.  

Another thing to consider is if a motorist decides he’d like to end the lease before the time has elapsed.  Typically, an auto leasing service will charge hefty fees if the motorist tries to terminate the lease before the end of the contract period.  This is due to all the interest money they will be losing.