Car leasing is similar to renting, but is technically a loan, with significantly lower payments because part of the amount borrowed is re-paid by returning the car at the end of the lease.

Lease-end “return value” (called residual value in leasing) is subtracted from the sale price of the vehicle at the beginning of a lease, and is based on expected number of miles to be driven and average wear (called depreciation in leasing). This significantly reduces the amount financed, which reduces monthly payment amount.

Similar to “lease to own” programs, if you decide to purchase your vehicle at lease-end instead of returning it, you only pay the “return value.” You get full credit for all your payments during the lease.

Like with any car loan, you also pay finance charges (called money factor in leasing), dealer fees, tax, tag, and title fees. And you must have full-coverage insurance. There are a couple of fees unique to leasing and also charges for returning a car with excessive mileage or damages. Sales tax (in most states) is only charged on monthly payments, not on the entire sale price of the vehicle.