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9 car leasing traps you must avoid in the process Of leasing a Vehicle In this series Leasing a Vehicle
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6 min read The book was published on May 5, 2022.
Writen 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 confidence to take control of their finances by providing precise, well-researched and well-researched content that breaks down complicated subjects into bite-sized pieces.
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Leasing a car may seem to be a great idea at first glance however, often leases come with so many caveats and risks that the disadvantages exceed the benefits of the arrangement. Even if you’re considering leasing a car instead owning one, be vigilant about the risks you’re taking. In contrast to owning a car which you could sell should you wish the opportunity to do so, leasing comes with a legally binding agreement — and you’d need to keep the car until the lease is over. Here are nine traps you risk falling into when leasing the car. 1. The potential for expensive mileage limitations The majority of leases have limits on the number of miles you can drive on your car every year. For reference, U.S. drivers average about 13,500 miles per year, as per the Federal Highway Administration. Certain car leases, specifically ones with low monthly installments with annual mileage caps of 10,000 miles or less as per Matt DeLorenzo, a senior managing editor at Kelley Blue Book. Based on the type of vehicle you are driving, you can expect to pay a mileage penalty of anywhere from 10 cents to 25 cents for each mile if you exceed your annual cap. The more expensive the cost of the vehicle and the more expensive the penalty. If the cost is $25 cents per mile and you exceed the cap by 3,000 miles per year, you’ll be looking at a hefty $750 in added expenses. Consider this: If you’re considering going the leased car approach, determine how many miles you average per year to be sure you are aware of the amount it will run you when you exceed the limit of mileage. 2. Early termination costs Should you want to end your lease earlier it could be necessary to pay a fair amount to get out of the contract. It’s contingent upon the terms of your lease however, you could have to pay the difference between the amount the car has depreciated and the amount you paid for it. In some cases, this charge might be many thousand dollars. Let’s say you’re leasing a $40,000 car. Within three years, the car has spent $18,000. But, the vehicle has depreciated by $21,000. If that’s the case, you may need to pay the difference between the amount you’ve already paid, $18,000 as well as the amount the car depreciated $21,000. This means you’d be on the hook for $3000. The early termination fees can include taxes as well as a fee , which can help offset the expense to the lender to purchase the vehicle. The borrower is also responsible to pay any late fees or parking tickets, as well as any outstanding monthly payments. Be sure to read the fine print on early termination clauses, which DeLorenzo suggests. «Find out precisely how much you’ll need to pay if the lease does not go to term,» he says. 3. Low residual value. The residual value is what the car will be worth at the end of your lease term. Let’s say that the lender estimates that the car you’re leasing right now is worth $15, 000 in three years’ time. Your monthly payments will be calculated to compensate for that $15,000 loss in value and so a lease for 36 months equates with monthly installments of $416.67 without interest or any taxes and charges. What is the residual value? It is the value agreed upon for the car when the lease ends. The residual value is inclusive of depreciation. 4. An advertised price that requires a huge down payment When you see a monthly lease cost advertised as below $200, be certain to research and know what you are engaging in, says DeLorenzo. In most cases, these prices are equivalent to huge down payments. You will want to check how much you are being requested to deposit in order to qualify for such low monthly payment. «A $5,000 upfront fee on a four-year lease effectively increases by more than $100 the advertised monthly payment,» DeLorenzo says. The lesson: There’s usually a catch if a lease is accompanied by low monthly payments: the down payment is substantial. 5. The monthly installments for purchasing as opposed to. leasing Some dealers could be trying to lure you into a lease by comparing the monthly payments for the two, and how much lower the monthly payment will be if you choose the leasing option. When you purchase a car, you get to own it at the conclusion of your . If you lease, you have to return the vehicle. Don’t fall for it when dealers try to contrast apples with oranges, and then tell you how much more financially savvy it is to lease an automobile. 6. Ignoring the cost of the car Just the fact that you lease it does not mean that you do not need to think about the price tag of the vehicle. It still matters, because the cost you pay to lease it is largely contingent on the price of the vehicle and its depreciation rate. What you should take away is that the price and worth of your vehicle do matter when leasing. 7. The fees at the beginning and the end of the lease. Prior to signing a lease be sure to be aware of charges. These might include: Acquisition fee: Also known as an administrative or bank fee it is a one-time fee that lenders charge to set up the lease. The cost can range from $400-$900. License and sales taxes may not be included in your monthly installment based on the state you live in and the individual contract, so be certain to read the specifics. The price to buy out when your lease is over, you will be able to buy the vehicle, instead of returning it to the lender. Costs associated with the end of lease If you choose to sell the vehicle then you’ll be responsible for paying end-of-lease fees or an disposition fee. It could include inspection of the vehicle, cleaning and reconditioning, storage costs, transportation and administrative fees. Wear-and-tear charges: You may be charged for equipment that was lost, or if the car suffers wear and tear beyond what’s covered in the agreement to lease. «Check for the specifics regarding what constitutes normal wear and tear’ at lease expiration, and what is your obligation for any repairs or maintenance at lease end,» DeLorenzo suggests. What you should know is that the cost of leasing a car goes beyond the monthly installment. Review all of the expenses before signing to the contract, and that includes the possibility of breaching the lease’s terms. 8. A longer lease to receive a lower monthly payment Let’s say that you speak to the lender to bring your monthly payments down. They return, letting you that they have discovered that they were able to get your payments down by extension of the lease. But the truth is that you’re not making any savings. While a longer lease term may mean that you pay less each month, you will also be paying more interest over the course of the lease. Beware of being deceived by a lower monthly installment that comes with a longer lease duration. If the lender proposes to extend the lease, you’ll pay more interest over the long run. 9. The money factor While there’s no APR in relation to leasing a car, there are financing charges. These are referred to as «money factor.» The money factor functions like an interest rate and determines the amount you’ll have to pay for finance charges. Like you would expect, the greater the value of the money factor, the more you’ll have to be charged. In contrast to interest rates, the money factor is calculated in decimal. To figure out what your finance charges are as a percentage, multiple 2400 times the amount of money you have to pay by. If your money factor is .0025 which is 6 percent, you’ll get 6 percent. Takeaway: When shopping for a lease for the car, inquire about what the money factor is. Steps to follow Avoid stumbling into one of these traps of leasing cars by following these steps: Be aware of your requirements: When making a decision on whether a lease for a car is right for you, think about the amount of miles you travel every year, what you can afford, and how leasing a vehicle will fit in with your personal preferences in lifestyle, financial goals and lifestyle. Review your credit report: Looking at your credit report before you receive offers can give you more leverage when negotiating the terms you desire. Find a comparison: To get the most competitive rates, speak with different lenders about their terms that are based on your credit. Negotiate as much as you can do: Although there are things you can’t discuss, such as the acquisition fee and residual value, you could potentially negotiate the disposition fee or buyout price. Be sure to read the fine print There may be hidden charges and limitations to the lease which may not be disclosed when you’re looking around. Before signing on the dotted line, be sure to pore over the fine print. The bottom line By understanding the mechanics of leasing a car and being aware of the cost, you will be able to avoid typical leasing traps and save yourself money. In addition, you should be attentive to leasing-related pitfalls to steer away from it is recommended to plan to plan ahead to be able to go into the leasing department with confidence and knowledge. Learn more
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Written by the writer who contributed to the article.
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 writing and editing for Bankrate since late 2021. They are dedicated to helping their readers gain the confidence to control their finances by providing precise, well-studied data that can break complex topics into manageable bites.
Auto loans editor
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