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 a commitment and many consider it far more of one. You're still signing a binding contract, so you can't be any less vigilant about negotiating and checking terms. And when you buy a car, you can always sell it if you don't like it. With a lease, you're pretty much stuck through the lease term.
Here are the 10 biggest booby traps of auto leasing:
1. Mileage monkeyshinesMost 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.
Example: 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 cents per mile). That's an extra $50 a month.
2. Early-termination tangleSome 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.
Example: 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. 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.
3. Residual-value ruseA 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 Kelley Blue Book or NADA. A lower residual value means higher monthly payments.
Example: 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.
4. Down-payment double-crossMany lease ads boast about low monthly payments while hiding a huge down payment figure in the fine print. 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.
Example: 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.
5. Purchase-price ploySome 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 because at the end of a purchase term, you own the car. At the end of a lease, you own nothing.