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9 traps in car leasing that you should avoid Part Of the process of leasing a Vehicle In this series Leasing a Vehicle
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6 minutes read. published May 5, 2022.
The story was written by Jackie Lam Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie is a writer on auto loans.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to control their finances with precise, well-researched and well-researched content that breaks down otherwise complex subjects into bite-sized pieces.
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A car lease may appear an ideal option initially, but often leases have so many stipulations and pitfalls that the drawbacks overshadow any advantages associated with the arrangement. If you’re thinking of leasing a car instead owning you should still be cautious about the risks you’re taking. Unlike owning a car, which you could sell at any time but leasing gives you a a legally binding agreement — and you’d need to hold on to the vehicle until your lease ends. Here are nine traps you’re at risk of falling into when leasing an automobile. 1. The potential for expensive mileage limitations Most car leases come with limitations on the amount of miles you can put on the car each year. For reference, U.S. drivers average around 13,500 miles per year, as per the Federal Highway Administration. Certain leases for cars, particularly those touting low monthly payments, include annual mileage caps that are less than 10,000 miles, says Matt DeLorenzo, a senior managing editor at Kelley Blue Book. The type of car you’re driving, you can expect to be charged a penalty that ranges from 10 cents to 25 cents for each mile when you exceed your annual cap. The more expensive the cost of the vehicle, the higher the fine. If the cost is $25 cents per mile and you go over the limit by 3,000 miles per year, you’ll pay an enormous $750 in added expenses. Consider this: If you’re contemplating going down the lease car approach, determine how many miles you travel on average every year to ensure you know how much the lease will cost in the event that you exceed the limit of mileage. 2. Early termination fees If you want to end your lease early it could be necessary to pay a pretty penny to end the agreement. It depends on the lease terms, but you might be required to pay the difference between the amount that the car has depreciated and what you have already purchased it for. In some cases, this charge might be thousands of dollars. Say you’re leasing the car for $40,000. After three years, you’ve spent $18,000. The car, however, has depreciated by $21,000. If that’s your situation, you may have to pay for the difference between what you’ve paid for, $18,000 as well as the amount the car has depreciated, $21,000. So, you’ll be responsible for $3000. Early termination costs can also include taxes and a , which can help offset the expense for the lender to let the vehicle go. Additionally, you will be accountable for paying off any late fees or parking tickets, as well as any unpaid monthly installments. Be sure to read the fine print of early termination clauses, which DeLorenzo recommends. “Find out precisely how much you’ll be required to pay if the lease does not go to term,” he says. 3. Low residual value The residual value is how much the car is worth at the end of your lease term. Let’s say that the lender believes that the $30,000 car you’re leasing today is worth $15, 000 in three years’ time. The monthly payment will be calculated in order to cover the loss of $15,000 and so a lease for 36 months is equivalent in monthly payment of $416.67 which does not include fees or taxes. charges. What is the residual value? It is the agreed-upon value for the car when the lease expires. The residual value is inclusive of depreciation. 4. A advertised price that calls for an enormous down payment. If you find a lease that is advertised at under $200, be sure to do your homework and know what you are being enticed by, says DeLorenzo. In most cases, these prices are equivalent to huge down payments. You should be aware of what amount you’re required to pay to be eligible for such low monthly payment. “A $5,000 upfront fee on a four-year lease increases by more than $100 the advertised monthly payment,” DeLorenzo says. The lesson: There’s usually a catch if a lease comes with low monthly payments, namely a hefty down payment. 5. The monthly payments for buying as opposed to. leasing Some dealerships might be trying to lure you into a lease by comparing the monthly payment for the two, and how much less your monthly payments would be if you went the leasing option. When you purchase a car, you get to own it at the conclusion of your . With leasing, you need to return the car. Don’t fall for it when a dealer tries to contrast apples with oranges and tell you that it’s more economical leasing a car. 6. Doing nothing to reduce the cost of the car Just because you are leasing does not mean you don’t have to be concerned about the cost of the car. It’s still important, since what you are paying to lease it is largely contingent on the price of the vehicle and the rate of depreciation. Takeaway: The price tag and value of your car do matter when leasing. 7. The fees at the beginning and end of the lease Before you sign a lease, make certain you are aware of the charges. This could include: Acquisition fee Also called an administrative or bank charge, this is a one-time cost that lenders have to pay to set up the lease. The cost can range from $400-$900. Taxes on sales and licenses may not be included in your monthly installment based on the state you reside in as well as the particular contract you signed, so make sure to review the fine print. The price to buy out: When your lease ends you’ll have the option to purchase the vehicle in lieu of it being returned to your lender. End-of-lease charges: If you decide to sell the vehicle, you’ll be responsible for the payment of end-of-lease costs or an disposition fee. This could include inspections of the vehicle cleaning and reconditioning storage costs, transportation as well as administrative costs. Wear-and-tear fees: You might be charged for the loss of equipment or if your vehicle is damaged beyond the scope of your lease contract. “Check for the specifics about what is considered normal wear and tear’ at lease termination, and also what is your obligation for any repairs or maintenance at the time of lease termination” DeLorenzo says. What you should know is that the cost of leasing a vehicle goes far beyond the monthly payments. Examine all the expenses before signing the dotted line, and that includes the possibility of violating the terms of the lease. 8. A longer term to get a lower monthly payment Let’s say you talk to the lender to get your monthly payment down. They call back, letting that they have discovered that they were able to reduce your monthly payments by extending the lease. The truth is you aren’t making any savings. While a longer lease term may mean that you pay less per month, you will also pay more interest during the lease. Takeaway: Don’t be fooled by a smaller monthly payment which is due to the longer lease duration. If the lender proposes to extend the lease to pay for more interest, you’ll be paying more in the end. 9. The money element While there’s no APR when it comes to leasing a car but there are financing costs. These are known as the “money factor.” The money factor is a lot like an interest rate, and it determines how much you’ll have to pay for finance charges. It is as you’d expect: the greater the value of the money factor, the greater the amount you will have to pay. Contrary to interest rates and other factors, the money factor is expressed as a decimal. To determine the amount of your financial charges as a percentage, multiple your money factor with 2,400. If your money factor is .0025 which is 6 percent, you’ll get 6 percent. Takeaway: When shopping for a lease deal on a car, ask what the cost factor is. Steps to follow Avoid stumbling into one of these car leasing traps by following these simple steps: Know your requirements: Before making a decision on whether a lease for a car is the best option for you, take into consideration how many miles you drive every year, the amount you can reasonably afford and how leasing a car is compatible with your needs as well as your lifestyle and financial goals. Review your credit report: Looking over your credit file before accepting offers can give you more leverage in negotiating the terms you prefer. Compare rates: To find the best rates, talk to lenders regarding their terms, that are based on your credit. Negotiate what you can: While there are some things you can’t negotiate, such as the acquisition fee and remaining value could potentially negotiate the disposition fee or buyout price. Be sure to read the fine print There are hidden charges and limitations to the lease which may not be disclosed when you’re shopping around. Before signing on your dotted line be certain to read the specifics. The key is understanding the mechanics of leasing a car and knowing the expenses, you can steer clear of the common leasing traps and save yourself money. While also being alert to leasing pitfalls to steer away from it is prudent to be prepared to ahead of time so you can go into the leasing department with confidence and knowledge. Find out more
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Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to control their finances with concise, well-studied and well-informed data that can break complicated topics into bite-sized pieces.
Auto loans editor
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