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9 common car leasing traps that you should avoid Part Of leasing a Vehicle In this series Leasing a Vehicle
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6 minutes read. The book was published on May 5, 2022.
Written by Jackie Lam Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie write about car loans.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing concise, well-studied information that breaks down otherwise complex subjects into digestible chunks.
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The idea of leasing a car might seem to be a great idea at first blush However, leases often come with so many caveats and risks that the disadvantages outweigh any benefits associated with the agreement. If you’re thinking of leasing a car instead of owning you should still be vigilant about the terms you’re signing. In contrast to owning a car which you could sell should you wish, leasing leaves you with a legally binding agreement — and you’d need to hold onto the vehicle until your lease expires. Here are nine traps you could fall into while leasing a car. 1. Limitations on mileage that could be costly The majority of leases have limitations on the amount of miles you can drive on the vehicle each year. For reference, U.S. drivers average around 13,500 miles per year, as per the Federal Highway Administration. Some car leases, especially those touting low monthly payments with annual mileage caps that are less than 10,000 miles as per Matt DeLorenzo, a senior managing editor at Kelley Blue Book. Based on the type of vehicle you are driving, you should expect to be charged a penalty ranging from 10 cents to $25 cents per mile when you exceed your annual cap. The higher the price tag of the vehicle is, the greater the penalty. If your fine is 25 cents for each mile, and you exceed the cap by 3,000 miles in a year, you’ll be looking at a hefty $750 in added costs. The lesson to take away: If you’re contemplating going down the lease car option, calculate the number of miles you travel on average every year to be sure you know how much leasing will be costing you if you go over the mileage cap. 2. Early termination costs Should you decide to terminate your lease earlier, you might have to pay a fair amount to end the agreement. It depends on the terms of your lease however, you could be required to pay the difference between the amount the vehicle has depreciated in comparison to what you have already spent on it. In some cases, this charge might be several thousand dollars. Say you’re leasing a $40,000 car. In the course of three years you’ve paid $18,000. But, the vehicle has depreciated by 21,000. If that’s an issue, then you may be required to pay the difference between the amount you’ve already paid, $18,000 as well as the amount the vehicle has depreciated by, $21,000. This means you’d be in the pocket of $3,000. Early termination costs could also include taxes and a , which helps offset the cost for the lender to purchase the vehicle. You will also be responsible to pay any late fees, parking tickets and any unpaid monthly installments. Takeaway: Read the fine print regarding early termination clauses, which DeLorenzo suggests. «Find out exactly how much you’ll have to pay in the event that your lease doesn’t go to term,» he says. 3. Low residual value. The residual value is how much the car is worth at the expiration of the lease. Let’s suppose that the lender thinks that the car you’re leasing right now will be worth $15,000 within three years. The monthly payment will be calculated to cover that $15,000 loss in value and so a lease for 36 months is equivalent to monthly payments of $416.67 without fees or taxes. charges. Takeaway: Residual value is the value agreed upon for the car when the lease ends. The residual value is inclusive of depreciation. 4. A advertised price that calls for a huge down payment When you find a lease payment advertised as being below $200, be sure to do your homework and be aware of what you’re being enticed by, says DeLorenzo. Often, these low prices equate to massive down payments. It is important to know how much you are being required to pay to be eligible for 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 an issue if a lease is accompanied by low monthly payments, namely the down payment is substantial. 5. The monthly payments for purchasing as opposed to. leasing Some dealerships may try to entice you to lease by comparing monthly payments for , and how much lower your monthly payments could be if you chose the leasing route. Remember: when you buy an automobile, you are entitled to own it at the conclusion of your . If you lease, you have to return the vehicle. Don’t fall for it when a dealer tries to contrast apples with oranges and tell you how much more financially savvy it is to lease an automobile. 6. Ignoring the cost of the vehicle Just the fact that you lease it doesn’t mean you don’t need to worry about the price tag of the vehicle. It still matters, because the amount you pay to lease it is largely contingent on the price of the car and the rate of depreciation. Takeaway: The price tag and worth of your vehicle do matter when leasing. 7. Fees at the beginning and the end of the lease. Prior to signing a lease make sure you’re aware of all the charges. They could include: Acquisition fees: Also called an administrative or bank charge it is a one-time fee charged by lenders to put the lease together. The amount could range from about $400 to $900. License and sales taxes may not be included in your monthly installment dependent on the state that you reside in as well as the individual contract, so be sure to review the fine print. The price to buy out If your lease expires you’ll be able to purchase the car in lieu of it being returned to your lender. End-of-lease charges: If you decide to sell the vehicle to the lender, you’ll be accountable for the payment of end-of-lease costs which is also known as a disposition fee. This might include vehicle inspection cleaning and reconditioning, storage, transportation , and administrative charges. Wear-and-tear charges: You may be charged for the loss of equipment, or if the car has wear and tear that is beyond what’s covered in your lease contract. «Check out the specific terms about what is considered normal wear and tear’ when lease expiration, and the responsibility you have for any repairs or maintenance at lease termination,» DeLorenzo suggests. What you should know is that the cost of leasing a car goes beyond the monthly payment. Review all of the expenses before signing the dotted line, which includes the possibility of breaching the terms of the lease. 8. A longer term to get lower monthly payments Let’s say you contact the lender to get your monthly payments down. They return, letting you know that lo and behold, they were able to get your payments down by extending the lease. In reality, you’re not making any savings. Although a longer lease period can mean you will pay less per month, you’ll also pay more interest during the lease. Beware: Don’t get fooled by a smaller monthly payment due to a longer lease period. If the lender proposes to extend the lease, you’ll pay more interest in the end. 9. The money factor Although there is no APR with regards to a car lease but there are financing costs. They are referred to as the «money factor.» The money factor works similar to an interest rate and it determines how much you’ll have to pay for financing charges. It is as you’d expect: the higher the amount of money factor, the more you will have to pay. Contrary to interest rates and other factors, the money factor is calculated in decimal. To determine the amount of your financial charges as a percentage, multiple the money factor by 2,400. So, if your money factor is .0025, that’s 6 percent. Consider this: when you are looking for a lease deal on a car, ask what the money factor is. The next step is to protect yourself from falling into one of these traps of leasing cars by following these steps: Be aware of your requirements: When deciding if a lease on a car is the best option for you, take into consideration the number of miles you drive every year, the amount you are able to afford, and whether leasing a car will fit in with your personal preferences in lifestyle, financial goals and lifestyle. Examine your credit score: Going at your credit report before you receive offers can give you more leverage in negotiating the terms you desire. Shop around: To get the best rates, talk to lenders regarding their terms and conditions based on your credit. You can negotiate what you want to: While there are some things you can’t bargain over, like the acquisition fee and values of residuals, it is possible to can be able to negotiate the disposal fee or the buyout price. Check the fine print carefully There are hidden charges and lease limitations that might not be revealed when you’re looking around. Before you sign on your dotted line make sure to study the details. The key is understanding how leasing a car works and being aware of the expenses, you can steer clear of typical lease traps, and also save cash. In addition, you should be alert to leasing-related pitfalls to steer away from it is prudent to be prepared to plan ahead to be able to walk into the leasing office with confidence and understanding. Find out more
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Written by a contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie is a writer on auto loans.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are dedicated to helping their readers to control their finances with concise, well-studied and well-informed facts that break down otherwise complex subjects into digestible pieces.
Auto loans editor
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