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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 minutes read. Published May 05, 2022
Written by Jackie Lam Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain confidence to manage their finances with precise, well-researched and well-researched content 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 pitfalls that the drawbacks overshadow any advantages associated with the agreement. Even if you’re considering leasing a car instead of owning one, be vigilant about the risks you’re taking. As opposed to owning a vehicle, which you could trade in if you’d like the opportunity to do so, leasing comes with a legally binding agreement -and you’ll have to hold onto the car until your term expires. Here are the nine traps you’re at risk of falling into when leasing the car. 1. Potentially expensive mileage restrictions Most car leases come with limits on the number of miles you can drive on your car every year. As a reference point, U.S. drivers average about 13,500 miles per year, as per the Federal Highway Administration. Certain car leases, specifically ones that offer low monthly payments, include annual mileage caps that are less than 10,000 miles as per Matt DeLorenzo, a senior managing editor at Kelley Blue Book. The type of car you’re driving, you can expect to pay a mileage penalty of anywhere from 10 cents to 25 cents per mile when you go over your annual limit. The more expensive the cost of the vehicle is, the greater the fine. If the penalty is 25 cents per mile and you exceed the cap by 3,000 miles per year, you’ll pay an astronomical $750 in additional costs. Takeaway: If you are considering going the leased car approach, determine how many miles you average per year to be sure you are aware of how much it will run you when you exceed the limit of mileage. 2. Early termination costs Should you wish to end your lease early, you might have to pay quite a bit to get out of the lease. It is contingent on the lease terms, but you might have to pay for the difference between the amount that the vehicle has depreciated in comparison to the amount you paid for it. In some instances, this charge might be several thousand dollars. Let’s 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 the case, you could have to pay for the difference between what you’ve already paid, which is $18,000 and the amount that the vehicle has depreciated by, $21,000. This means you’d be on the hook for the sum of $3,000. The early termination fees can include taxes as well as a fee , which helps offset the cost for the lender to let the vehicle go. You will also be responsible for the payment of any late charges, parking tickets and any remaining monthly payments. Make sure you read the fine print on early termination clauses, which DeLorenzo recommends. «Find out exactly how much you’ll have to pay in the event that the lease does not go to term,» he says. 3. Low residual value. The residual value is how much the car will be worth at the expiration of the lease. Let’s say that the lender believes that the $30,000 car you’re leasing right now is worth $15, 000 in three years’ time. The monthly payment will be calculated to compensate for that $15,000 loss in value and a lease of 36 months is equivalent to monthly payments of $416.67 which does not include the interest, taxes or fees. The residual value is the agreed-upon value of the car when the lease comes to an end. The residual value is inclusive of depreciation. 4. A price advertised that demands a huge down payment When you see a monthly lease cost advertised as under $200, be sure to conduct your research and understand what you’re getting into, DeLorenzo says. Most of the time, these low rates are equivalent to huge down payment. It is important to know the amount you’re requested to deposit to be eligible for low monthly payment. «A $5,000 upfront fee for a lease of four years will add more than $100 to the advertised monthly payment,» DeLorenzo says. It is common to find an opportunity to save money if the lease comes with lower monthly payments: the down payment is substantial. 5. The monthly payment for purchasing vs. leasing Some dealerships could attempt to convince you to lease by comparing monthly payments for , and how much lower your monthly payments will be if you choose the leasing route. When you purchase a car, you get to keep it until the end of your . If you lease, you have to return the car. Don’t fall for it by dealers who try to compare apples to oranges and explain how much more financially savvy leasing a car. 6. Not paying attention to the price of the car just the fact that you lease it does not mean you don’t have to worry about the cost of the car. It still matters, because what you are paying to lease it largely depends on the price of the car and the rate of depreciation. It is important to note that the price and value of your car are important when leasing. 7. Fees at the beginning and the end of the lease. Before you sign a lease, make certain you are aware of charges. They could include: Acquisition fee: Also called an administrative or bank fee This is a once-off fee charged by lenders to put the lease together. The amount can run anywhere between $400 and $900. License and sales taxes: This might not be included in the monthly payment based on the state you reside in and your specific contract, so be sure to read the fine print. Price to buy out: When your lease ends you’ll be able to buy the vehicle, rather than returning the vehicle to its lender. End-of-lease fees: If you decide to return the car, you’ll be responsible for paying end-of-lease fees, also known as the disposition fee. This might include vehicle inspection cleaning and reconditioning, storage costs, transportation and administrative fees. Wear and tear fees: You could be charged for the loss of equipment, or if the car is damaged beyond the scope of your lease contract. «Check out the specific language regarding what constitutes normal wear and tear’ when lease expiration, and what your responsibility is for any repairs or maintenance at the time of lease termination» DeLorenzo suggests. Takeaway: 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 breaking the terms of the lease. 8. A longer-term lease that gives you an affordable monthly installment Let’s say you talk to the lender to negotiate your monthly payments down. They respond, letting you that they have discovered that, they were able to lower your payments by prolonging the lease. The truth is you aren’t making any savings. While a longer lease term can mean you will pay less every month, you’ll also be paying more interest over the course of the lease. Takeaway: Don’t be fooled by a smaller monthly payment that comes with an extended lease duration. If the lender proposes to extend the lease, you’ll pay more interest in the end. 9. The money element While there’s no APR when it comes to a car lease however, there are finance charges. They are referred to as the «money factor.» The money factor functions like an interest rate, and determines the amount you’ll have to pay for financing charges. It is as you’d expect: the greater the value of the money factor, the higher you will be charged. In contrast to interest rates and other factors, the money factor is expressed in decimal. To determine the cost of your financing as a percentage, multiple the money factor by 2,400. 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. Steps to follow Avoid falling into one of these car leasing traps by following these simple steps: Know your requirements: Before deciding whether a car lease is the right choice for you, take into consideration how many miles you drive every year, the amount you are able to afford, and whether leasing a car would fit with your preferences in lifestyle, financial goals and lifestyle. Examine your credit score: Going over your credit file before you receive offers can aid you in gaining more leverage to negotiate the terms you desire. Shop around: To get the best rates, talk to lenders about their terms in relation to your credit score. Negotiate what you can: While there are some things you can’t negotiate, such as the acquisition fee or residual value, you may be able to negotiate the disposal fee or the buyout price. Be sure to read the fine print There may be hidden charges and limits to your lease that might not be revealed when you’re looking around. Before signing on the dotted line, be sure to pore over the specifics. The bottom line By understanding the process of leasing a car and being aware of the costs, you can avoid the common leasing traps and save cash. While also being alert to leasing pitfalls to steer away from it is recommended to plan to plan ahead to be able to walk into the leasing office with confidence and knowledge. Learn more
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Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie write about car loans.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers feel confident to manage their finances through providing concise, well-studied and well-informed facts that break down complicated topics into bite-sized pieces.
Auto loans editor
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