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9 traps in car leasing that 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 5, 2022.

Writen by Jackie Lam 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 gain confidence to manage their finances through providing clear, well-researched information that breaks down complicated subjects into digestible chunks.

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The idea of leasing a car might seem to be a great idea at first blush, but often leases have so many stipulations and pitfalls that the drawbacks exceed the benefits of the deal. Even if you’re considering leasing a car instead having one, you must be cautious about the terms you’re signing. Unlike owning a car, which you could trade in if you’d like but leasing gives you a legal binding contractand you’ll have to hold on to the car until the lease ends. Here are the nine traps you could fall into while leasing a car. 1. The potential for expensive mileage limitations Many leases include limits on the number of miles you can put on the vehicle each year. For reference, U.S. drivers average around 13,500 miles per year, as per the Federal Highway Administration. Certain car leases, specifically ones that offer low monthly payments and annual mileage limits of 10,000 miles or less, says Matt DeLorenzo, a senior managing editor at Kelley Blue Book. The kind of car you’re driving, expect to pay a mileage penalty that ranges from 10 cents to $25 cents per mile when you exceed the annual limit. The higher the price tag of the car, the higher the fine. If your cost is $25 cents per mile and you go over the limit by 3,000 miles over a year, you’ll pay a hefty $750 in added costs. The lesson to take away: If you’re contemplating going down the lease car route, estimate how many miles you travel on average every year to ensure you are aware of the amount it will run you if you go over the mileage cap. 2. Early termination costs Should you wish to end your lease early, you might have to pay a pretty penny to be able to exit the agreement. It’s contingent upon the lease terms, but you might be required to pay the difference between the amount the car is depreciating and the amount you spent on it. In some instances, this charge might be many thousand dollars. Say you’re leasing an automobile worth $40,000. After three years, you’ve paid $18,000. But, the vehicle has been depreciated by $21,000. If this is an issue, then you could need to pay the difference between the amount you’ve paid for, $18,000 and the amount that the car has depreciated, $21,000. That means you’ll be responsible for $3000. Early termination costs can also include taxes as well as a fee , which helps offset the cost for the lender to sell the vehicle. Additionally, you will be accountable to pay any late charges or parking tickets, as well as any outstanding monthly payments. Takeaway: Read the fine print of early termination clauses, which DeLorenzo recommends. “Find the exact amount you’ll need to pay if your lease doesn’t go to term,” he says. 3. Low residual value The residual value is what the car will be worth at the end of your lease term. Let’s suppose that the lender thinks that the car you’re leasing now 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 to monthly payments of $416.67, not including fees or taxes. charges. Takeaway: Residual value is the agreed-upon value of the car when the lease ends. The residual value includes depreciation. 4. A price advertised that demands an enormous down payment. If you find a lease that is advertised at less than $200, make sure to conduct your research and know what you are getting into, DeLorenzo says. Most of the time, these low rates are equivalent to huge down costs. You should be aware of what amount you’re asked to put down in order to qualify for low monthly costs. “A $5,000 upfront fee on a four-year lease effectively will add more than $100 to the advertised monthly payment,” DeLorenzo says. The lesson: There’s usually an issue if a lease has lower monthly payments: a hefty down payment. 5. The monthly payment for buying vs. leasing Some dealers could be trying to lure you into a lease by comparing the monthly payments for , and how much less the monthly payment would be if you went the leasing option. When you purchase an automobile, you are entitled to own it at the conclusion 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 tell you how much more profitable leasing an automobile. 6. Ignoring the cost of the car Just the fact that you lease it does not mean that you do not need to be concerned about the cost of the car. It still matters, because the amount you pay to lease it largely depends on the cost of the car as well as its depreciation rate. Takeaway: The price tag and worth of your vehicle will be a factor when you lease. 7. The fees at the beginning and end of the lease. Before you sign a lease, be sure you’re aware of all the charges. This could include: Acquisition fee: Also called an administrative or bank fee, this is a one-time fee that lenders charge to tie the lease together. The amount could range from about $400 to $900. Sales taxes and license fees may not be included in your monthly payment based on the state you reside in and your particular contract you signed, so make sure to review the small print. Price to buy out If your lease expires you’ll have the option to purchase the car instead of returning it to the lender. End-of-lease fees: If you decide to return the car, you’ll be responsible for the payment of end-of-lease costs which is also known as the disposition fee. This might include vehicle inspection cleaning and reconditioning, storage, transportation costs as well as administrative costs. Wear-and-tear fees: You might be charged for equipment that was lost or if the vehicle is damaged beyond the scope of the lease agreement. “Check out the specific language on what constitutes ‘normal wear and tear’ when lease termination, and also what your responsibility is for any repairs or maintenance at the time of lease termination” DeLorenzo suggests. It is important to note that the expense of leasing a car goes beyond the monthly installment. Examine all the expenses before signing to the contract, including the possibility of violating the terms of the lease. 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 installments reduced. They return, letting you know that lo and behold they were able to lower your payments by prolonging the lease. But the truth is that you’re not saving any money. Although a longer lease period could mean that you pay less every month, you’ll pay more interest during the lease. Beware of being deceived by a lower monthly payment which is due to the longer lease term. If the lender suggests stretching the term and you’re paying more interest in the long term. 9. The money element While there’s no APR with regards to a car lease but there are financing costs. These are referred to as “money factor.” The money factor works like an interest rate and is the determining factor for how much you’ll pay in financing charges. As you might expect, the higher the money factor, the more you’ll have to have to pay. Unlike interest rates and other factors, the money factor is expressed as a decimal. To determine what your finance charges are 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. Consider this: when you are looking for a lease for a car, ask what the cost factor is. The next step is to protect yourself from stumbling into one of these traps of leasing cars by following these easy steps: Understand your requirements: When deciding if a lease on a car is the right choice for you, think about how many miles you drive every year, the amount you can reasonably afford and how leasing a car is compatible with your needs in lifestyle, financial goals and lifestyle. Check your credit: Looking at your credit report prior to receiving offers could give you more leverage to negotiate the terms you prefer. Shop around: To get the best rates, speak with different lenders regarding their terms, based on your credit. Negotiate what you can do: Although there are things you can’t negotiate, such as the acquisition fee or residual value, you can possibly negotiate the disposition fee or buyout price. Read the fine print There are hidden charges and limits to your lease that may not be apparent when you’re shopping around. Before signing on to sign the contract, be certain to read the details. The bottom line By understanding the mechanics of leasing a car and being aware of the expenses, you can steer clear of the common leasing traps and save cash. Along with remaining attentive to leasing issues to stay away from, it’s prudent to be prepared to prepare ahead of time to ensure that you enter the leasing office with knowledge and confidence. Learn more

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Written by a 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 dedicated to helping their readers feel confident to control 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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