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9 traps in car leasing that you should avoid Part Of Leasing a Vehicle In this series Leasing a Vehicle
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6 min read Published May 05, 2022
Writen by Jackie Lam Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie write about car loans.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to take control of 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 like a good idea at first blush, but often leases are accompanied by a myriad of caveats and risks that the disadvantages outweigh any benefits associated with the agreement. If you’re thinking of leasing a car rather than having one, you must be aware of the terms you’re signing. As opposed to owning a vehicle, which you could sell should you wish the opportunity to do so, leasing comes with a legally binding agreement -and you’ll have to hold onto the car until the lease expires. There are nine traps that you could fall into while leasing an automobile. 1. Potentially expensive mileage restrictions The majority of leases have limitations on the amount of miles you can drive on your car every year. For reference, U.S. drivers average 13500 miles a year, as per the Federal Highway Administration. Certain car leases, specifically ones that offer low monthly payments with annual mileage caps of less than 10,000 miles as per Matt DeLorenzo, a senior managing editor at Kelley Blue Book. The type of vehicle you are driving, expect to pay a mileage penalty ranging from 10 cents to 25 cents per mile if you go over the annual limit. The more expensive the cost of the car and the more expensive the fine. If your cost is $25 cents per mile, and you exceed the cap by 3,000 miles per year, you’ll be looking at an astronomical $750 in additional costs. Takeaway: If you are considering going the leased car route, estimate how many miles you travel on average every year in order to know how much it will run you in the event that you exceed the mileage cap. 2. Costs for early termination if you decide to terminate your lease earlier and you want to get out of the lease early, you may have to pay quite a bit to be able to exit the contract. It’s contingent upon the terms of your lease, but you might have to pay the difference between the amount the vehicle has depreciated in comparison to the amount you purchased it for. In some instances the cost could be several thousand dollars. For instance, suppose you lease a $40,000 car. Within three years, the car has spent $18,000. But, the vehicle has depreciated by $21,000. Should that be your situation, you may need to pay the difference between what you’ve paid for, $18,000 as well as the amount the car has depreciated, $21,000. That means you’ll be in the pocket of the sum of $3,000. The early termination fees can comprise taxes and a which can help offset the expense for the lender to let the vehicle go. Additionally, you will be accountable to pay any late charges such as parking tickets or remaining monthly payments. Make sure you read the fine print on early termination clauses, DeLorenzo suggests. “Find out exactly how much you’ll be required to pay if your lease doesn’t go to the end of its term,” he says. 3. Low residual value. The residual value represents how much the car will be worth at the end of your lease term. Let’s say the lender estimates that the car you’re leasing right now is worth $15, 000 within three years. The monthly payment will be calculated in order to cover that $15,000 loss in value and so a lease for 36 months is equivalent in monthly payment of $416.67 which does not include fees or taxes. fees. The residual value is the agreed-upon value of the car when the lease ends. The residual value is inclusive of depreciation. 4. A advertised price that calls for the payment of a large down-payment. If you see a monthly lease payment advertised as being less than $200, make sure to conduct your research and understand what you’re getting into, DeLorenzo says. Often, these low prices can translate into massive down costs. It is important to know how much you are being requested to deposit to be eligible for these low monthly costs. “A $5,000 upfront charge for a lease of four years increases by more than $100 the monthly amount advertised,” DeLorenzo says. It is common to find a catch if a lease has low monthly payments: the down payment is substantial. 5. The monthly payments for purchasing in comparison to. leasing Some dealerships might attempt to convince you to lease by comparing the monthly payments for each, and how much less your monthly payments could be if you chose the leasing option. Remember: when you buy the car, you will be able to keep it until the time you have reached the . If you lease, you have to return the car. Don’t fall for it when a dealer tries to compare apples to oranges and tell you how much more financially savvy it is to lease a car. 6. Ignoring the cost of the vehicle Just the fact that you lease it doesn’t mean you don’t need to be concerned about the cost of the vehicle. It’s still a matter of concern, as the amount you pay to lease it largely depends on the price of the car as well as the rate of depreciation. What you should take away is that the price and value of your car will be a factor when you lease. 7. Fees at the beginning and end of the lease. Before the lease is signed, be certain you are aware of the charges. This could include: Acquisition fee Also called an administrative or bank charge This is a once-off fee charged by lenders to tie the lease together. The amount can run anywhere between $400 and $900. Taxes on sales and licenses are not included in your monthly payment based on the state you reside in as well as the particular contract you signed, so make certain to check the small print. Price to buy out If your lease expires, you will be able to buy the vehicle, rather than returning the vehicle to its lender. End-of-lease charges: If you decide to take the car back to the lender, you’ll be accountable to pay the end-of-lease charges, also known as the disposition fee. This could include inspections of the vehicle cleaning and reconditioning, storage, transportation costs as well as administrative costs. Wear and tear fees: You could be charged for the loss of equipment, or if the car suffers wear and tear that isn’t covered by the agreement to lease. “Check out the specific terms on what constitutes ‘normal wear and tear’ when lease termination, and also what is your obligation for repairs or maintenance following the time of lease termination” DeLorenzo suggests. It is important to note that the expense of leasing a car goes far beyond the monthly payments. Check out all expenses before signing to the contract, and that includes any that might come with breaking the lease’s terms. 8. A longer lease to receive a lower monthly payment Let’s say that you speak to the lender to get your monthly payment down. They call back, letting know that lo and behold, they were able to get your payments down by extending the lease. But the truth is that you’re not saving any money. While a longer lease term can mean you will pay less every month, you’ll also incur more interest throughout the lease. Beware: Don’t get fooled by a lower monthly payment due to the longer lease duration. If the lender suggests stretching the term to pay for more interest, you’ll be paying more in the end. 9. The money factor While there’s no APR in relation to a car lease however, there are finance charges. 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 fees for financing. Like you would expect, the higher the money factor, the higher you’ll pay. In contrast to interest rates and other factors, the money factor is calculated in decimal. To determine the amount of your financial charges in percentage, multiply the money factor by 2,400. For example, if your factor is .0025 6.5%, that’s 6 percent. Takeaway: When shopping for a lease deal on the car, inquire about what the money factor is. Steps to follow Avoid falling into one of these car leasing traps by following these simple steps: Know your requirements: When deciding whether a car lease is the right choice for you, take into consideration the amount of miles you travel each year, how much you can afford, and whether leasing a car would fit with your preferences, lifestyle and financial goals. Review your credit report: Looking over your credit file prior to receiving offers could help you have more leverage when negotiating the terms you prefer. Shop around: To get the best rates, speak to different lenders regarding their terms and conditions based on your credit. You can negotiate what you want to however: While there are things you can’t discuss, such as the acquisition fee and values of residuals, it is possible to may possibly negotiate the disposition fee or buyout price. Read the fine print There are hidden charges and lease limitations that may not be apparent when you’re shopping around. Before you sign on the dotted line, make certain to read the details. The bottom line By understanding the process of leasing a car and being aware of the costs, you can avoid the common lease traps, and also save cash. In addition, you should be attentive to leasing-related pitfalls to steer clear of it is always prudent to be prepared to plan ahead to be able to enter the leasing office with knowledge and confidence. Find out more
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Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie write about car loans.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to control their finances with precise, well-studied data that can break complicated topics into bite-sized pieces.
Auto loans editor
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