10 auto-leasing booby traps
By Karen
M. Kroll • Bankrate.com
Just because you're leasing a car instead
of buying, don't be any less skeptical about promises that sound too
good to be true.
After all, leasing is no less commitment.
You're still signing a binding contract, so you can't be any less
vigilant about negotiating and checking terms.
Before signing on the dotted line, make
sure you understand the calculations used to determine your lease
payment, the term of the lease, and all expenses included in your
lease agreement.
Here are the 10 biggest booby traps of
auto leasing:
Mileage Monkeyshines
Most leases are written to allow a certain number of miles each year.
Often, dealers offering low-cost leases cash in by setting this mileage
limit low -- say, 10,000 miles annually. Typically, the charge for
each mile over the limit is 10 cents to 20 cents per mile. Say you
drive 13,000 miles instead of the 10,000 allowed each year for three
years. At 20 cents for each extra mile, you'll owe $1,800 at the end
of your lease (9,000 excess miles times $.20 per mile). That's an
extra $50 a month.
Early-termination tangle
Some dealers lure customers into a new lease by touting their ability
to get you out of your existing lease before its term is up. And they
can, but you'll pay dearly. In some cases, you may have to pay the
difference between what the car is worth, and what you've already
paid for it, says Charlie Vogelheim, executive editor with Kelley
Blue Book in Irvine, Calif.
Say you're leasing a $20,000 car. After two years, you've paid $2,400
on it. However, the car has depreciated to $16,000. To terminate the
lease, you'll probably need to pay the difference between what you've
already paid ($2,400) and the amount that the car has depreciated
($4,000) or $1,600. What's more, some leases require you to cover
any remaining payments, says Jeff Ostroff, president and chief executive
officer with the Fort Lauderdale-based ConsumerNet Inc., publishers
of carbuyingtips.com.
If you have more than just a few months left on your lease, these
payments will quickly add up.
While the lessor may talk about "wrapping" or including
these fees within a new lease, that's not the smartest way to go.
You'll end up paying much more, because you're financing the amounts
over a longer time period.
Residual-value ruse
A critical factor in leasing a car is called the residual value
-- how much it will be worth when the lease ends. For instance,
the lender may figure that a car selling for $20,000 today will
be worth $10,000 three years from now, and will calculate monthly
payments to cover that loss in value. Different lenders calculate
residuals differently. "Ideally, the residual is the average
used-car value from a standard like Kelly Blue Book or NADA,
" says James Walsh, editorial director of Silver Lake Publishing,
Los Angeles.
A lower residual value means higher monthly payments. A $15,000 residual
value on a $25,000 car would mean your lease payments would have to
cover the $10,000 difference. In a 36-month lease this would mean
monthly payments of $277.77 ($10,000 divided by 36), not including
interest, taxes and other fees. If another lender predicts that the
same car will be worth only $13,000, your monthly payments will be
$333.33 ($12,000 divided by 36).
A lower residual value is not always bad, however. If you decide
to purchase the car at the end of the lease, you'll pay the lower
residual value, plus any purchase-option fee.
Down-payment double-cross
Many lease ads boast about low monthly payments while hiding a huge
down payment figure in the fine print. They also call this "capitalization
costs." Remember, your real lease payment isn't just the amount
you write on your check each month. You also need to factor in the
down payment. If you put down $4,000 on a 36-month lease, you should
understand your real cost per month is about $111 more than your monthly
payment ($4,000 divided by 36 months). A dealer, then, could set the
monthly payment on a car incredibly low just by jacking up the down
payment. After all, if you made a big enough down payment you wouldn't
have to make any monthly payments at all.
Purchase-price ploy
Some dealers try to entice you into a contract by comparing the payments
you would make under a lease agreement to the payments you would make
to purchase the car. Remember, there should be a big difference --
at the end of a purchase term you own the car. At the end of a lease
you own nothing.
Price-doesn't-matter pitfall
Don't believe that because you're leasing, rather than purchasing
a car, you don't need to worry about the price of the car. You do.
Your monthly lease payment is partly based on the price of the car.
"Even with a lease, you want to understand the new car price,"
says Vogelheim of Kelley Blue Book.
Example: A car selling for $24,000 will have a residual value of
$12,000 in three years. You'll need monthly payments of about $333
to cover the depreciation ($12,000 divided by 36 months). But if the
starting price was $22,000 -- and the residual value remains $12,000
-- the monthly payments drop to about $278 ($10,000 divided by 36
months). Each month, you hang onto an extra $56.
The fee flimflam
Before you sign on the dotted line, you'll want to know the amount
of fees, in addition to your monthly payments. These can include
acquisition, purchase option and disposition fees. Acquisition fees,
sometimes referred to as document fees, are charged at the beginning
of a lease. They typically run about $500, says Michael
Kranitz, president of leasewizard.com.
A disposition fee is charged when you return the car. As its name
implies, this covers the dealer's cost to dispose of the car. These
fees usually are several hundred dollars. Finally, a purchase-option
fee is the amount it will cost to purchase the car at the end of the
lease. The exact amount can vary.
While these are one-time fees, they still affect the overall cost
of the lease. You'll want to negotiate everything and consider them
in your computations when deciding which dealer to use.
Hidden-cost hoodwink
Don't automatically assume the monthly lease payment you're quoted
is the amount you'll actually be paying. "It may be quoted
without sales tax or license," says Philip Reed, author of
the Edmunds.com
book, Strategies for Smart Car Buyers. Ask what other ongoing charges
will come into play, so you don't suffer sticker shock when you
make your first payment.
Tricky-term trap
Manipulating the term of the lease is one of the easiest ways for
the dealer to get you to accept their deal at an inflated price.
Let's say you have your eyes on a small SUV with a sticker price
of $25,000. You negotiate the selling price down to $22,000 and the
dealer says the residual value is $12,000. That means your monthly
payment -- not counting taxes, interest and fees -- would be $277.77.
But you try to get the price down by telling the salesman you can
only afford $250 per month. He goes and talks to his manager and comes
back a half-hour later with the good news -- $250 it is. But the term
of the lease has gone from 36 months to 40 months -- which he may
or may not point out at the time. All that's happened is the term
has been extended -- you haven't saved one red cent.
Interest-rate razzle-dazzle
There is no such thing as an annual percentage
rate, on a lease, says Kranitz. "It doesn't matter what you
see in an ad. It (the APR listed) either is illegal, inaccurate
or not an APR."
The razzle-dazzle comes in when
the salesman or dealer tries to confuse you about APR and what's called
a "money factor." The money factor is expressed as a decimal
-- let's say .00260. An unscrupulous salesman might boast about an
interest rate with an APR of 2.6 percent. Then he applies the money
factor of .00260 to his calculations and you think you're paying 2.6
percent interest or APR.
But a money factor of .00260 means
an interest rate of 6.24 percent is actually being charged.
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