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9 car leasing traps you should stay clear of in Part Of leasing a Vehicle In this series Leasing a Vehicle
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6 minutes read. Published May 05, 2022
Writen by Jackie Lam Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto 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 gain the confidence to control their finances by providing clear, well-researched information that breaks down otherwise complex topics into manageable bites.
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Leasing a car may seem to be a great idea at first blush 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 having one, you must be cautious about the terms you’re signing. In contrast to owning a car which you could trade in should you wish the opportunity to do so, leasing comes with a legally binding agreement -which means you’ll need to hold onto the car until your term expires. Here are the nine traps you could fall into while leasing the car. 1. Potentially expensive mileage restrictions The majority of leases have limitations on the amount 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. Some car leases, especially ones that offer low monthly payments, include annual mileage caps that are less than 10,000 miles according to Matt DeLorenzo, a senior managing editor at Kelley Blue Book. Based on the kind of car you’re driving, you should expect to pay a penalty ranging from 10 cents to 25 cents per mile in the event that you go over your annual limit. The more expensive the cost of the car is, the greater the penalty. If the fine is 25 cents for each mile and you go over the limit by 3,000 miles over a year, you’re looking at a hefty $750 in added costs. Consider this: If you’re contemplating going down the lease car option, calculate the number of miles you drive on average each year to ensure you are aware of 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 early it could be necessary to pay a fair amount to be able to exit the agreement. It’s contingent upon the terms of your lease and you may have to pay the difference between the amount that the car has depreciated and what you’ve already paid for it. In some cases, this charge might be thousands of dollars. For instance, suppose you lease a $40,000 car. Within three years, the car has spent $18,000. The car, however, has depreciated by $21,000. Should that be an issue, then you could have to pay for the difference between the amount you’ve already paid, $18,000, and the amount the car depreciated $21,000. This means you’d be responsible for the sum of $3,000. The early termination fees can include taxes and a , that helps to offset the costs to the lender to let the vehicle go. The borrower is also responsible for paying off any late fees, parking tickets and any outstanding monthly payments. Takeaway: Read the fine print on early termination clauses, DeLorenzo suggests. “Find out precisely how much you’ll be required to pay if your lease doesn’t go to the end of its term,” he says. 3. Low residual value The residual value is what the car will be worth at the expiration of the lease. Let’s say that the lender estimates that the car you’re leasing today could be valued at $15,000 in three years’ time. The monthly payment will be calculated to compensate for that $15,000 loss in value and so a lease for 36 months amounts to monthly payments of $416.67, not including interest or any taxes and charges. What is the residual value? It is the agreed-upon value for the vehicle when the lease ends. The residual value also includes depreciation. 4. A advertised price that calls for a huge down payment When you see a monthly lease payment advertised as being under $200, be sure to do your homework and understand what you’re getting into, DeLorenzo says. Often, these low prices can translate into massive down payments. You will want to check how much you are being asked to put down in order to qualify for 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. It is common to find an opportunity to save money if the lease is accompanied by low monthly payments, namely an enormous down payment. 5. The monthly payments for purchasing in comparison to. leasing Some dealerships could try to entice you to lease by comparing the monthly payment for the two, 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 . When you lease, you must to return the car. Takeaway: Don’t be fooled by dealers who try to compare apples to oranges and explain that it’s more economical leasing a car. 6. Doing nothing to reduce the cost of the vehicle 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 amount you pay to lease it largely depends on the price of the car and its depreciation rate. Takeaway: The price tag and worth of your vehicle do matter when leasing. 7. Fees at the beginning and end of the lease Before signing a lease make sure to be aware of the charges. They could include: Acquisition fee Also known as an administrative or bank fee, this is a one-time cost that lenders have to pay to tie the lease together. The amount can run anywhere between $400 and $900. Taxes on sales and licenses may not be included in your monthly installment dependent on the state that you reside in and your particular contract you signed, so make sure to check the fine print. Cost to buy-out: When your lease ends you’ll be able to purchase the vehicle instead of returning it to the lender. Costs associated with the end of lease If you choose to sell the vehicle, you’ll be responsible for the payment of end-of-lease costs or the disposition fee. This could include inspections of the vehicle cleaning and reconditioning storage, transportation costs and administrative charges. Wear and tear fees: You could be charged for the loss of equipment or if your vehicle suffers wear and tear beyond what’s covered in the agreement to lease. “Check for the specifics about what is considered normal wear and tear’ at lease termination, and also what is your obligation for any repairs or maintenance at lease termination,” DeLorenzo suggests. It is important to note that the expense of leasing a vehicle goes beyond the monthly installment. Examine all the expenses before signing the dotted line, and that includes any that might come with breaching the terms of the lease. 8. A longer lease to receive lower monthly payments Let’s say that you speak to the lender to negotiate your monthly payment down. They return, letting you know that , as it turns out they could lower your payments by extension of the lease. In reality, you’re not making any savings. While a lease with a longer term could mean that you pay less each month, you’ll pay more interest during the lease. Takeaway: Don’t be fooled by a lower monthly installment due to an extended lease period. If the lender proposes to extend the lease to pay for more interest, you’ll be paying more over the long run. 9. The money factor Although there is no APR when it comes to a car lease however, there are finance charges. These are referred to as “money factor.” The money factor is a lot like an interest rate and it determines how much you’ll have to pay for finance charges. As you might expect, the greater the value of the money factor, the more you will have to pay. Unlike interest rates, the money factor is expressed in decimal. To determine the cost of your financing in percentage, multiply the money factor by 2,400. For example, if your factor is .0025, that’s 6 percent. The lesson to remember: When you’re looking for a lease for the car, inquire about what the money factor is. Next steps Protect yourself from falling into these traps of leasing cars by following these steps: Be aware of 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 can reasonably afford and how leasing a vehicle would fit with your preferences in lifestyle, financial goals and lifestyle. Check your credit: Looking over your credit file prior to receiving offers could aid you in gaining more leverage in negotiating the terms you want. Compare rates: To find the best rates, speak with different lenders regarding their terms and conditions that are based on your credit. You can negotiate what you want to: While there are some items you cannot bargain over, like the acquisition fee or values of residuals, it is possible to could possibly negotiate the disposition fee or buyout price. Be sure to read the fine print There are hidden charges and limits to your lease that might not be revealed while you’re comparing options. Before you sign on to sign the contract, make sure to study the specifics. The bottom line By understanding the mechanics of leasing a car and being aware of costs, you can avoid common leasing traps and save yourself money. Along with remaining alert to leasing-related pitfalls to steer away from it is wise to take the time to ahead of time 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 editing and writing for Bankrate from late 2021. They are committed to helping readers to control their finances by providing concise, well-studied and well-informed information that breaks down otherwise complex subjects into digestible pieces.
Auto loans editor
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