How do you convert a lease's money factor to an APR?

Multiply the money factor by 2,400 to get an approximate APR. For example, a money factor of 0.00125 equals roughly 3.0% APR. This lets you compare a lease's finance charge against a loan's interest rate on an apples-to-apples basis.

What happens if you exceed the mileage limit on a car lease?

Most leases cap annual mileage at 10,000–15,000 miles. Going over the cap triggers per-mile overage fees, typically $0.15–$0.30 per mile, charged when you return the vehicle at lease end. If you expect to drive more than the standard cap, negotiate a higher mileage allowance upfront — it's cheaper than paying overage fees later.

Can you end a car lease early?

Yes, but it's expensive. Ending a lease before the term is up typically means you owe the remaining monthly payments plus an early termination fee. Unlike a car loan, you can't simply sell the vehicle to pay off the balance, since you don't own it. The FTC's leasing guide recommends reviewing the early-termination clause before signing if there's any chance your circumstances could change.

What's the difference between a lease's capitalized cost and residual value?

Capitalized cost is the negotiated price of the vehicle the lease is based on — you can and should negotiate it like a purchase price. Residual value is the dealer or manufacturer's estimate of what the car will be worth at lease end. Your monthly payment covers the depreciation between these two numbers, plus a finance charge, so a higher residual value (relative to the capitalized cost) means a lower monthly payment.

Is leasing or buying better if you drive a lot of miles?

Buying is generally better for high-mileage drivers. If you drive more than roughly 15,000–18,000 miles per year, mileage overage fees on a lease will erode or eliminate any monthly-payment savings. Buying has no mileage cap, and if you plan to keep the vehicle for many years after payoff, ownership is almost always cheaper long-term than repeated leasing.

What is car leasing and how does it work?

Leasing a car means paying for the vehicle's depreciation during a set period (typically 24–36 months) plus finance charges, rather than purchasing ownership. At lease end, you return the car, buy it at the pre-set residual value, or lease a new one. Monthly lease payments are lower than loan payments for the same vehicle, but you build no equity and face mileage, wear-and-tear, and early-termination penalties.

When you buy a car with a loan, your monthly payment covers the full purchase price minus your down payment, plus interest. When you lease a car, your monthly payment covers only the portion of the vehicle's value that you'll 'use up' during the lease — the depreciation — plus a finance charge. The FTC's guide to vehicle leasing is the primary U.S. consumer resource and explains your rights under the federal Consumer Leasing Act (15 U.S.C. § 1667).

The core mechanics of a car lease

Capitalized cost: The negotiated purchase price of the vehicle. You can (and should) negotiate this just like you would if buying.
Residual value: The dealer/manufacturer's estimate of what the car will be worth when the lease ends. A higher residual value means lower monthly payments — it reduces the depreciation you're financing.
Money factor: The lease's financing cost, expressed as a small decimal (e.g., 0.00125). To convert to an approximate APR, multiply by 2,400. A money factor of 0.00125 = roughly 3.0% APR equivalent.
Depreciation: The difference between the capitalized cost and the residual value. This is what your payments cover.
Monthly payment: (Depreciation ÷ Lease term) + Finance charge. The CFPB has a lease-vs.-buy comparison tool at consumerfinance.gov/consumer-tools/auto-loans/.

What restrictions come with a lease?

Mileage limits. Most leases cap annual mileage at 10,000–15,000 miles. Exceeding the cap triggers per-mile overage fees (typically $0.15–$0.30/mile) at lease return. Estimate your annual mileage accurately upfront.
Wear-and-tear standards. The leasing company defines what counts as 'normal' vs. 'excessive' wear. At lease return, excessive wear (large dents, significant tire wear, cracked glass) triggers additional charges. The FTC requires lessors to disclose their wear-and-tear standards in writing.
Early termination. Ending a lease early is expensive — you typically owe the remaining monthly payments plus an early termination fee. Unlike a car loan, you can't simply sell the car to pay off the balance.
No equity building. Every payment goes toward depreciation and finance charges. At lease end, you own nothing — no trade-in value, no asset.

When leasing makes more sense than buying

You prefer driving a new car every 2–3 years with current technology and warranty coverage.
The vehicle is primarily for business use (leasing costs may be deductible — consult a CPA).
You drive predictable, limited annual mileage well within the lease cap.
Monthly cash flow is more important to you than long-term asset building.

When buying makes more sense

You drive more than 15,000–18,000 miles per year (mileage penalties will eliminate any lease savings).
You want to own the car outright after 5–7 years with no payments.
You modify vehicles or use them for activities that generate above-average wear.
You plan to keep the car for many years — leasing is always more expensive long-term if you intend to keep driving the same vehicle.

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