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9 traps in car leasing that 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.
The edit was done by 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 concise, well-studied information that breaks down otherwise complex subjects into bite-sized pieces.
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The idea of leasing a car might seem like a good idea at first glance However, leases often are accompanied by a myriad of caveats and pitfalls that the drawbacks outweigh any benefits associated with the agreement. Even if you are considering leasing a car rather than owning you should still be cautious about what you are getting into. In contrast to owning a car that you can sell at any time but leasing gives you a a legally binding agreement — and you’d need to hold onto the car until the lease expires. There are nine traps that you’re at risk of falling into when leasing the car. 1. Potentially expensive mileage restrictions Most car leases come with a cap on the number of miles you can drive on the car each year. To give you an example, U.S. drivers average 13500 miles a year, according to the Federal Highway Administration. Certain car leases, specifically ones with low monthly installments, include annual mileage caps that are less than 10,000 miles according to Matt DeLorenzo, a senior managing editor at Kelley Blue Book. The type of car you’re driving, you can expect to pay a penalty that ranges from 10 cents to 25 cents per mile when you exceed your annual limit. The more expensive of the vehicle is, the greater the penalty. If the penalty is 25 cents per mile and you go over the limit by 3,000 miles per 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 approach, determine how many miles you average per year to ensure you are aware of how much the lease will cost you when you exceed the limit of mileage. 2. Early termination fees If you wish to end your lease earlier it could be necessary to pay a fair amount to end the agreement. It’s contingent upon the terms of your lease however, you could have to pay for the difference between the amount that the car is depreciating and what you have already paid for it. In certain cases the amount could be thousands of dollars. For instance, suppose you lease the car for $40,000. After three years, you’ve spent $18,000. But, the vehicle has depreciated by 21,000. If this is your situation, you could have to pay for the difference between what you’ve paid for, $18,000 as well as the amount the car depreciated $21,000. So, you’ll be responsible for $3,000. The early termination fees can include taxes as well as a fee , which can help offset the expense for the lender to let the vehicle go. The borrower is also responsible for the payment of any late fees, parking tickets and any outstanding monthly payments. Make sure you read the fine print of early termination clauses, DeLorenzo recommends. “Find out precisely how much you’ll be required to pay if 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 end of your lease term. Let’s say that the lender believes that the $30,000 car you’re leasing today is worth $15, 000 within three years. Your monthly payments will be calculated in order to cover that $15,000 loss in value and so a lease for 36 months amounts in monthly payment of $416.67 which does not include the interest, taxes or charges. What is the residual value? It is the agreed-upon value of the car at the time the lease ends. The residual value includes depreciation. 4. A advertised price that calls for a huge down payment When you find a lease that is advertised at less than $200, make sure to conduct your research and know what you are engaging in, says DeLorenzo. Often, these low prices are equivalent to huge down costs. You should be aware of what amount you’re requested to deposit to be eligible for these low monthly payments. “A $5,000 upfront fee for a lease of four years adds 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 an enormous down payment. 5. The monthly payments for buying vs. leasing Some dealerships might try to entice 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. Rememberthat when you purchase a car, you get to keep it until the end of your . When you lease, you must to return the vehicle. Don’t fall for it when dealers try to contrast apples with oranges and tell you how much more financially savvy leasing an automobile. 6. Not paying attention to the price of the car Just the fact that you lease it doesn’t mean you don’t need to be concerned about the cost of the vehicle. It still matters, because the cost you pay to lease it is largely contingent on the cost of the vehicle and its depreciation rate. It is important to note that the price and the value of your vehicle will be a factor when you lease. 7. Fees at the start and at the end of the lease. Before you sign a lease, be sure to be aware of the charges. This could include: Acquisition fees: Also called an administrative fee or bank fee it is a one-time fee that lenders charge to set up the lease. The amount can run anywhere from $400-$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 review the fine print. The price to buy out: When your lease ends you’ll be able to buy the car rather than returning the vehicle to its lender. End-of-lease fees If you choose to return the car to the lender, you’ll be accountable for the payment of end-of-lease costs which is also known as an disposition fee. This might include vehicle inspection cleaning and reconditioning, storage costs, transportation and administrative fees. Wear-and-tear fees: You might be charged for equipment that was lost or if the vehicle suffers wear and tear beyond what’s covered in the agreement to lease. “Check out the specific terms regarding what constitutes normal wear and tear’ at lease expiration, and what is your obligation for repairs or maintenance after the time of lease termination” DeLorenzo explains. It is important to note that the expense of leasing a vehicle goes beyond the monthly installment. Check out all costs involved before signing on the dotted line, including those that could result from violating the lease’s terms. 8. A longer-term lease that gives you a lower monthly payment Let’s say that you speak to the lender to negotiate your monthly payment down. They respond, letting you that they have discovered that, they were able to lower your payments by prolonging the lease. But the truth is that you’re not making any savings. Although a longer lease period can mean you will pay less every month, you will also pay more interest during the lease. Beware of being deceived by a lower monthly installment due to the longer lease period. If the lender suggests stretching the term and you’re paying more interest in the long term. 9. The money factor While there’s no APR when it comes to a car lease, there are financing charges. These are known as the “money factor.” The money factor is a lot like an interest rate, and determines the amount you’ll pay in finance charges. Like you would expect, the higher the money factor, the greater the amount you’ll pay. Unlike interest rates and other factors, the money factor is expressed as a decimal. To determine the cost of your financing in percentage, multiply 2400 times the amount of money you have to pay by. So, if your money factor is .0025 6.5%, that’s 6 percent. Takeaway: When shopping for a lease on a car, ask what the cost factor is. Steps to follow Avoid falling into these traps of leasing cars by following these simple steps: Know your needs: When deciding if a lease on a car is the best option for you, think about the number of miles you drive every year, the amount you are able to afford, and whether leasing a car would fit with your preferences as well as your lifestyle and financial goals. Review your credit report: Looking at your credit report before accepting offers can give you more leverage in negotiating the terms you prefer. Compare rates: To find the best rates, talk to lenders regarding their terms, that are based on your credit. Negotiate what you can however: While there are things you can’t discuss, such as the acquisition fee or remaining value could potentially negotiate the disposition fee or the 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 to sign the contract, be certain to read the specifics. The key is understanding the process of leasing a car and being aware of the costs, you can avoid common rental traps to save yourself money. Along with remaining alert to leasing pitfalls to steer clear of it is always prudent to be prepared to ahead of time so you can enter the leasing office with confidence and understanding. Find out more
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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 writing and editing for Bankrate since the end of 2021. They are committed to helping readers to take control of their finances with precise, well-studied information that breaks down complicated topics into bite-sized pieces.
Auto loans editor
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