How is car leasing different from buying?

In simple terms, an auto lease is a long-term rental.

When you lease a car, the lease agreement you sign specifies how long you have the car and how many miles you can drive during this time period. A popular lease term is 36 months (3 years) and 12,000 miles/year (36,000 miles). You are not prevented from exceeding this mileage, but you will pay a per-mile penalty for every mile you are over (as defined in the lease agreement). Once the lease agreement expires, you must return the car to the lease company or purchase it from them at a pre-determined amount. The car also must be returned in good condition with only "normal wear and tear". A fee may be charged if the lease company feels the car's condition is worse than expected.

Leases are often much cheaper than a traditional loan because the actual dollar value being financed is much lower. When you purchase and finance a car, the loan is for the total purchase price. For example, let's say the car you want has a purchase price of $25,000. With a traditional loan, the loan amount will be $25,000 (less any down payment), broken up into a monthly installments over the lengh of the loan. If you lease that same $25,000 car, the actual dollar amount financed may be less than half the retail price. A lease basically covers the value that you will use over the lease term, verses the actual cost of the car. The buyout option at the end of the lease would typically be the remaining amount not financed.

One common misleading statement about leases is that you do not own the car. While this is true, you don't actually own the car while you finance it either. When you finance a car, you only truly own it after your loan is paid off and the finance company provides a copy of the title in your name. While you are paying the loan, the finance company owns the car. The same is true for a lease. The biggest difference here is that a financed car will be registered in your name, whereas a leased car will be registered in the lease companies name.