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9 common car leasing traps that you must avoid in the process Of the process of leasing a Vehicle In this series Leasing a Vehicle
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6 min read Published May 05, 2022
The story was written by Jackie Lam Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing clear, well-researched information that break down complex subjects into bite-sized pieces.
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A car lease may appear to be a great idea initially, but often leases are accompanied by a myriad of caveats and drawbacks that the negatives exceed the benefits of the deal. Even if you are considering leasing a car instead having one, you must be vigilant about what you are getting into. As opposed to owning a vehicle, which you could trade in if you’d like but leasing gives you a a legally binding agreement -and you’ll have to hold onto the car until the lease ends. Here are the nine traps you could fall into while leasing the car. 1. The potential for expensive mileage limitations Most car leases come with a cap on the number of miles that you can put on the vehicle each year. For reference, U.S. drivers average 13500 miles a year, as per the Federal Highway Administration. Some car leases, especially those touting low monthly payments, include annual mileage caps of 10,000 miles or less as per Matt DeLorenzo, a senior managing editor at Kelley Blue Book. Depending on the type of car you’re driving, you should expect to be charged a penalty that ranges between 10 cents and 25 cents per mile if you go over your annual cap. The more expensive the cost of the car is, the greater the fine. If the cost is $25 cents per mile, and you exceed the cap by 3,000 miles in a year, you’ll pay an enormous $750 in added cost. Consider this: If you’re considering going the leased car approach, determine how many miles you drive on average each year in order to know how much it will run when you exceed the limit on mileage. 2. Early termination costs Should you wish to end your lease early, you might have to pay a fair amount to end the contract. It depends on the lease terms, but you might have to pay for the difference between the amount the car is depreciating and what you have already spent on it. In certain cases the amount could be thousands of dollars. Let’s say you’re leasing a $40,000 car. After three years, you’ve spent $18,000. The car, however, has been depreciated by $21,000. If that’s your situation, you may have to pay for the difference between the amount you’ve already paid, which is $18,000 as well as the amount the car depreciated $21,000. So, you’ll be on the hook for $3000. The early termination fees can comprise taxes and a which helps offset the cost for the lender to purchase the vehicle. You will also be responsible to pay any late charges or parking tickets, as well as any outstanding monthly payments. Be sure to read the fine print on early termination clauses, DeLorenzo recommends. «Find out precisely how much you’ll have to pay in the event that the lease does not go to the end of its term,» he says. 3. Low residual value. The residual value represents what the car will be worth at the expiration of the lease. Let’s say the lender believes that the $30,000 car you’re leasing today is worth $15, 000 in three years’ time. Your monthly payments will be calculated to compensate for that $15,000 loss in value, so a 36-month lease amounts with monthly installments of $416.67 which does not include the interest, taxes or fees. What is the residual value? It is the agreed-upon value for the car at the time the lease expires. The residual value also includes depreciation. 4. A advertised price that calls for the payment of a large down-payment. If you find a lease cost advertised as less than $200, make sure to do your homework and know what you are getting into, DeLorenzo says. In most cases, these prices equate to massive down costs. It is important to know what amount you’re required to pay to be eligible for these low monthly costs. «A $5,000 upfront charge for a lease of four years will add more than $100 to the advertised monthly payment,» DeLorenzo says. Takeaway: There is usually an opportunity to save money if the lease is accompanied by low monthly payments, namely a hefty down payment. 5. The monthly payment for buying as opposed to. leasing Some dealers might be trying to lure you into a lease by comparing monthly payments for , and what the monthly payment could be if you chose the leasing option. Remember: when you buy an automobile, you are entitled to own it at 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 the car. 6. Ignoring the cost of the vehicle Just that you lease doesn’t mean you don’t need to think about the cost of the car. It’s still a matter of concern, as the amount 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 the value of your vehicle do matter when leasing. 7. Fees at the beginning and at the 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 fee it is a one-time fee that lenders charge to tie the lease together. The amount could range from about $400 to $900. Taxes on sales and licenses: This might not be included in your monthly payment depending on the state you reside in and your specific contract, so be sure to check the specifics. Cost to buy-out: When your lease ends you’ll have the option 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 paying end-of-lease fees or the disposition fee. This might include vehicle inspection, cleaning and reconditioning, storage, transportation , and administrative fees. Wear-and-tear fees: You might be charged for the loss of equipment, or if the car is damaged that isn’t covered by the lease agreement. «Check out the specific terms about what is considered normal wear and tear’ when lease termination, and also what is your obligation for repairs or maintenance after lease termination,» DeLorenzo suggests. What you should know is that the cost of leasing a car goes beyond the monthly installment. Examine all the costs involved before signing on the dotted line, which includes any that might come with breaching the lease’s terms. 8. A longer term to get lower monthly payments Let’s say you contact the lender to bring your monthly payment down. They call back, letting know that lo and behold, they were able to reduce your monthly payments by prolonging the lease. The truth is you aren’t saving any money. While a lease with a longer term may mean that you pay less per 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 the longer lease period. If the lender suggests stretching the term to pay for more interest, you’ll be paying more over the long run. 9. The money element While there’s no APR in relation to a lease on a car however, there are finance charges. These are referred to as «money factor.» The money factor functions similar to an interest rate and it determines how much you’ll pay in financing charges. It is as you’d expect: the greater the value of the money factor, the more you’ll have to pay. In contrast to interest rates, the money factor is expressed as a decimal. To figure out 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. Takeaway: When shopping for a lease deal on an automobile, find out what the money factor is. Next steps Protect yourself from falling into one of these traps of leasing cars by following these easy steps: Understand your requirements: When making a decision on whether a lease for a car is the best option for you, think about how many miles you drive every year, the amount you can afford, and whether leasing a car will fit in with your personal preferences, lifestyle and financial goals. Review your credit report: Looking through your credit history prior to receiving offers could give you more leverage when negotiating the terms you desire. Shop around: To get the best rates, speak to different lenders regarding their terms, that are based on your credit. You can negotiate what you want to: While there are some items that you aren’t able to discuss, such as the purchase fee and the remaining value could potentially negotiate the disposition fee or the purchase price. Check the fine print carefully There are hidden charges and lease limitations which may not be disclosed while you’re comparing options. Before signing your dotted line be sure to study the fine print. The key is understanding how leasing a car works and knowing the expenses, you can steer clear of typical lease traps, and also save money. While also being vigilant when it comes to leasing issues to stay away from it is prudent to be prepared to plan ahead so you can walk into the leasing office with confidence and understanding. Learn 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 editing and writing for Bankrate since the end of 2021. They are committed to helping readers to manage their finances by providing clear, well-researched data that can break otherwise complicated topics into bite-sized pieces.
Auto loans editor
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