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9 car leasing traps you should avoid Part Of 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.
Written 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 editing and writing for Bankrate since late 2021. They are committed to helping readers gain confidence to manage their finances by providing concise, well-studied information that breaks down otherwise complex topics into manageable bites.
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Leasing a car may seem an ideal option at first glance, but often leases have so many stipulations and risks that the disadvantages outweigh any benefits associated with the agreement. Even if you are considering leasing a car rather than having one, you must be aware of what you are getting into. As opposed to owning a vehicle, which you could sell if you’d like the opportunity to do so, leasing comes with legal binding contractwhich means you’ll need to hold onto the car until the lease is over. There are nine traps that you risk falling into when leasing an automobile. 1. Limitations on mileage that could be costly Many leases include limits on the number of miles you can drive on the car each year. To give you an example, U.S. drivers average around 13,500 miles per year, as per the Federal Highway Administration. Certain leases for cars, particularly ones that offer low monthly payments and annual mileage limits that are less than 10,000 miles, says Matt DeLorenzo, a senior managing editor at Kelley Blue Book. Depending on the type of car you’re driving, you can expect to pay a mileage penalty that ranges from 10 cents to 25 cents for each mile when you exceed the annual limit. The more expensive the cost of the vehicle, the higher the penalty. If the fine is 25 cents for each mile and you exceed the cap by 3,000 miles per year, you’ll pay an enormous $750 in added expenses. Consider this: If you’re contemplating going down the lease car route, estimate how many miles you average per year to be sure you know how much the lease will cost you when you exceed the limit on mileage. 2. Costs for early termination if you wish to end your lease earlier, you might have to pay quite a bit to end the lease. It depends on the terms of your lease however, you could be required to pay the difference between the amount that the car is depreciating and what you’ve already purchased it for. In certain cases the cost could be several thousand dollars. For instance, suppose you lease an automobile worth $40,000. After three years, you’ve spent $18,000. The car, however, has been depreciated by $21,000. Should that be an issue, then you might be required to pay the difference between what you’ve already paid, $18,000 and the amount that the car depreciated $21,000. This means you’d be in the pocket of $3000. Early termination costs could also include taxes and a , which helps offset the cost to the lender to sell the vehicle. Additionally, you will be accountable for the payment of any late fees such as parking tickets or outstanding monthly payments. Make sure you read the fine print on early termination clauses that DeLorenzo recommends. “Find the exact amount you’ll need to pay if your lease doesn’t 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 thinks that the car you’re leasing right now is worth $15, 000 in three years’ time. The monthly payment will be calculated in order to cover that $15,000 loss in value and so a lease for 36 months equates with monthly installments of $416.67, not including interest or any taxes and charges. Takeaway: Residual value is the value agreed upon for the vehicle when the lease ends. The residual value includes depreciation. 4. A advertised price that calls for a huge down payment When you find a lease cost advertised as less than $200, make certain to research and understand what you’re engaging in, says DeLorenzo. In most cases, these prices are equivalent to huge down costs. You will want to check how much you are being required to pay in order to qualify for low monthly payments. “A $5,000 upfront charge for a lease of four years will add more than $100 to the advertised monthly installment,” DeLorenzo says. It is common to find an issue if a lease comes with low monthly payments: the down payment is substantial. 5. The monthly payments for purchasing in comparison to. leasing Some dealerships could try to entice you to lease by comparing monthly payments for , and how much lower your monthly payments would be if you went the leasing route. Remember: when you buy a car, you get to keep it until the time you have reached the . With leasing, you need 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 leasing a car. 6. Not paying attention to the price of the vehicle Just that you lease does not mean that you do not need to be concerned about the price tag of the car. It’s still a matter of concern, as what you are paying to lease the car is mostly contingent on the price of the car as well as its depreciation rate. Takeaway: The price tag and value of your car do matter when leasing. 7. Fees at the start and end of the lease Before signing a lease be certain you are aware of the fees. 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 can run anywhere between $400 and $900. License and sales taxes: This might not be included in your monthly payment depending on the state you reside in and your individual contract, so be certain to review the fine print. The price to buy out If your lease expires you’ll be able to purchase the car in lieu of it being returned to your lender. Costs associated with the end of lease If you choose to take the car back to the lender, you’ll be accountable for paying end-of-lease fees which is also known as a disposition fee. It could include inspection of the vehicle, cleaning and reconditioning, storage, transportation , as well as administrative costs. Wear-and-tear fees: You might be charged for equipment that was lost, or if the car is damaged beyond the scope of the lease agreement. “Check for the specifics on what constitutes ‘normal wear and tear’ at lease end, and what is your obligation for any repairs or maintenance at lease termination,” DeLorenzo explains. It is important to note that the expense of leasing a car is beyond the monthly installment. Check out all costs involved before signing on the dotted line, and that includes the possibility of breaching the terms of the lease. 8. A longer lease to receive lower monthly payments Let’s say you talk to the lender to bring your monthly payments down. They return, letting you know that , as it turns out they were able to lower your payments by extending the lease. But the truth is that you’re not making any savings. While a longer lease term can mean you will pay less each month, you’ll pay more interest during the lease. Beware of being deceived by a smaller monthly payment that comes with a longer lease term. 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 with regards to a car lease however, there are finance charges. These are known as the “money factor.” The money factor functions like an interest rate and is the determining factor for how much you will pay in fees for financing. Like you would expect, the higher the amount of money factor, the more you’ll pay. Contrary to interest rates, the money factor is calculated as a decimal. To figure out what your finance charges are as a percentage, multiple the money factor by 2,400. If your money factor is .0025 6.5%, that’s 6 percent. Consider this: when you are looking for a lease deal on a car, ask what the cost 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 if a lease on a car is right for you, think about the number of miles you drive each year, how much you are able to afford, and how leasing a car would fit with your preferences in lifestyle, financial goals and lifestyle. Review your credit report: Looking through your credit history before you receive offers can give you more leverage when negotiating the terms you desire. Shop around: To get the best rates, talk with different lenders regarding their terms, based on your credit. You can negotiate what you want to do: Although there are items that you aren’t able to negotiate, such as the acquisition fee or values of residuals, it is possible to may possibly negotiate the disposition fee or the buyout price. Be sure to read the fine print There are hidden charges and limits to your lease that might not be revealed when you’re shopping around. Before you sign on the dotted line, be sure to study the fine print. The bottom line By understanding the mechanics of leasing a car and being aware of the expenses, you can steer clear of common rental traps to save yourself money. Along with remaining vigilant when it comes to leasing pitfalls to steer away from, it’s prudent to be prepared to prepare ahead of time so you can walk into the leasing office with confidence and knowledge. Find out more
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Written by a 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 late 2021. They are dedicated to helping their readers to manage their finances through providing concise, well-studied and well-informed facts that break down complex topics into manageable bites.
Auto loans editor
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