Short-Term Car Lease: What You Need To Know

A lease lets you pay for only a portion of the car, instead of the entire car. The remaining percentage is the residual value, which is the dollar amount the lease company thinks the vehicle will be worth at the end of your lease. A high residual value equates to a lower monthly payment. 

If the vehicle you lease is worth a 40% residual value at the end of 36 months (the average lease term), your rental payments are based on you paying for 60% of the car over your lease term. People who like to drive new cars like to lease since they can upgrade their car frequently. 

An essential factor to consider when choosing a car to lease is the better the make and model, the higher the residual percentage will be. The J.D. Power 2023 ALG Residual Value Awards results include 13 brands with the highest percentage value of the manufacturer's suggested retail price (MSRP) after three years of ownership. 

The awards included five Kia, four Toyota, four Honda, and GMC, Jeep, and Volkswagen. The best-selling vehicle in the United States is the Toyota Camry, but it didn't make the list. However, Toyota does rank high for their 4Runner, Tacoma, Tundra, and GR Supra.

Cox Automotive says the average price of a new car is $49,388 in 2023, and if people were leasing cars to avoid higher payments, why have they stopped leasing? It’s because leasing doesn't make fiscal sense for buyers any longer. The benefits of leasing have faded away between higher down payments, higher interest rates (the money factor in a lease), lower residual values, and fewer dealer and manufacturer incentives. During leasing's heyday, leasing was encouraged, and manufacturers gave dealers incentives to encourage leases, like lower rates and cash incentives.

Forbes reported in 2018 that these incentives were going away in the future due to rising interest rates. These incentives included base payments under $200 (not including taxes, tags, and other fees), which in today's money, is unheard of when the average lease payment is in the $600 and $700 range. Most of the low-payment deals were only offered to those customers with excellent credit scores.

Leases are like retail contracts where you have a sale price plus fees. It's called a Capitalized Cost (Cap Cost) in a lease, and it can include fees like acquisition fees – sometimes upward of $500 – any remaining loan balance on your trade-in, and the car's sale price.

The adjusted cap costs include dealer rebates, money down, trade-in value, and any other incentives from the manufacturer. The adjusted cap cost is what the payments are based upon. Since all cars depreciate, you pay your depreciation monthly rather than over the entire length of a retail contract. The monthly payments combine the monthly depreciation, the finance charge and the tax.

Many people decide to keep their cars at the end of their lease term rather than turn them in and get into another lease because of high prices of new and used cars. Because you never own the car during a lease, you can choose to turn the car in and get another one, buy the lease contract out and refinance the difference in a retail contract, or walk away from the lease.

As with anything, there are pros and cons to taking out a short-term car lease. Here are some of them:

Pros 

• Latest models – Many people want to be the first to have the latest cars, and a short-term lease works well for them. At the end of the lease, they walk away and into another new vehicle. 
• Short-term commitment – If you don't like buying a car and having payments for five years, then you might want a short-term lease.
• Temporary needs – Whether you're a college student or an employee who has been relocated, you might need a new car for a short time. A short-term lease could work well with your work or school schedule.

 Cons 

• More money – Because the term is shorter, the payments are higher. Your down payment may also be more because the contract may call for a first-month payment, acquisition fee, security deposit, and other costs like tag and title.
• Mileage limits – All leases have a mileage limit depending upon the contract; the average mileage is 12,000 yearly. 12,000 miles can come up before the term ends; you could run over the allowed mileage faster than anticipated. If you exceed the mileage, then you pay a mileage penalty when you turn the car into the lease company. The back of the lease agreement has the amount charged for going over the mileage.
• Less incentive from dealerships – Dealerships and manufacturers offer rebates and incentives for some leases. It may be hard to find a dealership that will write a short-term lease. If they do offer short leases, you may not qualify for any rebates or other incentives.

Short-term leases are available, but unlike the longer leases and retail contracts, you might need to get a little creative to find one. Here are some ideas to help you find a suitable short-term contract to suit your lifestyle.

Lease take over

Even though the leasing numbers are down, there are still plenty of people in lease cars looking for someone to take over their payments.

Like a used car listing, internet sites specializing in lease takeovers let people post their vehicles, the remaining months, the monthly payment, and other information about the make and model. If you want to do a lease swap with someone, your credit must meet the leasing company's credit requirements, and you do not get to negotiate the payment.

When you take over a lease, you take on the responsibility for the vehicle condition.  Make sure that the car is in good condition and under the mileage limitations before you swap. 

Subscription service 

A more novel short-term lease approach is subscribing to a car through FINN. Think short-term car subscriptions such as a six or 12-month term without the complications of a lease. The monthly payments include insurance, maintenance and roadside assistance. It’s easy to qualify for a vehicle in just a few minutes and it’s all done online.

There's a large selection of cars; all you have to do is pick one out. Just choose your term length and mileage package, and apply online. The approval process is quick, and it will be delivered directly to your doorstep. At the end of your term, you turn the car back in and find another vehicle to drive.

Long-term rental 

The rental car industry took a big hit during the pandemic. No one was traveling or knew when they would be able to travel again, so cars sat on the lots for months. Wired reports that some rental car offices sold their vehicles to dealerships when used cars were at a premium, while other lots tried to hold off on depleting the inventory. Other factors included people relocating and dropping off vehicles at airports once they could travel again, leaving some rental car lots empty and others with excess.

Rental cars are still an option for short-term rentals. While prices may still be high, you may be able to negotiate with a local rental office and make a deal on a longer rental, even 6-months if you need it.

Traditional lease

A short-term lease may require a bigger down payment. It depends on the make and model, the lease terms, and the residual value. 

Here are some places you can find short-term contracts:

• Dealerships: Check with your local, new car dealers for information
• Rental cars: Enterprise, Dollar Car Rental, Budget Car Rental
• Lease swaps: Swapalease, Leasetrader, Quitalease
• Car subscriptions: FINN