Mistakes to avoid when leasing a car
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Leasing a car gives you a vehicle to drive for a fixed number of miles and months. It’s similar to renting an apartment instead of buying a house. There is less long-term commitment involved, but you still have to pay for it.
The monthly cost of leasing a car is often lower than buying it with an auto loan. Drivers save an average of $139 per monthly payment, according to Experian’s State of the Automotive Finance Market report for the first quarter of 2023. However, there are downsides to be aware of.
7 mistakes to avoid when leasing a car
Leasing can lower your payments, but it can be very costly if you don’t pay attention to the fine print. Avoid these five common mistakes if you decide to lease your next vehicle.
1. Paying too much money upfront
Car dealers advertise low monthly lease payments on new vehicles, but you may have to pay several thousand dollars upfront to get that affordable payment. That money covers a portion of the lease in advance.
If the car is wrecked or stolen within the first few months, your insurance company will reimburse the leasing company for the value of the car, but the leasing company would likely not refund your down payment. You’d be out of a car, and that upfront money you handed over to the leasing company would essentially disappear.
It’s recommended you spend no more than about $2,000 upfront when you lease a car. In some cases, it may make sense to put nothing down and roll all of your fee costs into the monthly lease payment. If something happens to the vehicle before the end of the term, at least the leasing company doesn’t have a big chunk of your cash.
2. Not negotiating the lease agreement
Several components of lease agreements are often negotiable, including the:
- Buyout price: The amount you’ll pay the dealer if you opt to purchase the vehicle when the lease ends.
- Disposition fee: This fee covers the dealer’s costs to prepare the vehicle for sale once it’s turned in.
- Gross capitalized cost: Also known as the vehicle’s sales price, this figure impacts the monthly payment and the buyout price.
- Mileage allowance: Leases come with a preset number of miles you’re allowed to drive annually, and failing to adhere to this cap means you’ll incur added fees unless you buy the vehicle when the lease ends.
- Money factor: The price you’ll pay to lease the vehicle — essentially, the interest rate.
Failing to negotiate these figures could mean you’re leaving several hundreds or thousands of dollars in cost savings on the table.
3. Not buying gap insurance
If you drive a leased car, you should pay for gap insurance. The “gap” refers to the difference between what you still owe on your lease and the car’s value.
Let’s say your contract states that at the end of the lease, you can buy the car for $13,000. If you crash and total the car before the lease expires, your insurance company will determine the car’s current market value and pay that amount to the dealership which owns the vehicle.
Suppose the insurance company says that the market value is only $9,000. In that case, you’ll probably have to pay $4,000 out of pocket to cover the difference between the lease contract’s residual value and the true market value — unless you have gap insurance. The gap coverage will cover the difference.
Many leases include gap insurance. The dealer may offer to sell you gap insurance, but you may find a cheaper policy option with a traditional insurance company. Regardless, the coverage is well worth the small investment.
4. Underestimating how many miles you’ll put on a car
To avoid extra charges, know your driving habits before leasing a car. Consider your daily commute and how often you take long trips. You could ask for a higher mileage limit if you know you’ll probably drive more miles than the agreement allows. However, that will probably increase your monthly payment because additional miles will result in greater depreciation.
It’s common for leasing contracts to have annual mileage limits of 10,000, 12,000 or 15,000 miles. If you exceed those mileage limits, you could be charged up to 30 cents per additional mile at the end of the lease.
For example, if you exceed the mileage limit by 5,000 miles, you could end up owing an extra $1,500 — at 30 cents per mile — when you turn the car in at the end of the lease.
5. Not maintaining the car
If your car has damage that goes beyond normal wear and tear, you could be on the hook for additional fees when it’s time to return it to the dealer.
If a car has a scratch but the mark is less than the width of the edge of a driver’s license or business card, many companies may consider it normal use and probably won’t charge a penalty. If the leasing company considers any damage excessive, it can charge additional fees.
The definition of normal use can vary from dealer to dealer. Your lessor will inspect the car before you turn it in and look for dents and scrapes on the body and wheels, damage to the windshield and windows, excessive wear on the tires and tears or stains in the interior upholstery. Don’t assume that your inspector will be lenient.
6. Leasing a car for too long
Make sure that the lease period either matches or is shorter than the car’s warranty period. Warranties vary from manufacturer to manufacturer, but they typically last up to three years or 36,000 miles, whichever comes first.
If you keep the car for longer than the warranty period, you may have to consider an extended warranty. Otherwise, you could be responsible for maintenance and repair costs for a car you don’t own while still making monthly lease payments.
It’s probably better to buy the car if you’re planning to lease it for an extended period, says Barbara Terry, a Texas-based automobile expert and columnist.
“If the driver owns the car, he’d have to pay for the car and pay for maintenance, but then he could continue to drive it for several years without having to worry about a required monthly lease payment,” Terry says.
Use an auto lease calculator to figure out whether leasing or buying a car will save you more money over the long haul.
7. Not considering lease-specific insurance requirements
If you’ve ever financed a car, you may already know that most lenders require you to carry comprehensive and collision. If this is your first time insuring a leased vehicle, however, you might not be aware that you may also have to increase your liability limits.
The liability coverage portion of your auto policy pays for the other party’s medical expenses and property damage if you’re at fault in an accident. In addition to comprehensive and collision, most leasing companies require you to carry liability limits of at least $100,000 per person and $300,000 per accident for bodily injury, along with $50,000 for property damage. You may see this denoted as 100/300/50 on your policy documentation.
Depending on your current liability coverage, these limits may increase your car insurance premium — which may already be higher than you’re used to after adding your newly leased vehicle. To avoid surprises, you may want to get an insurance quote for the car you’re considering before signing on the dotted line.
How to lease a car
A car lease is a way to “borrow” a car instead of buying a new or used car. It typically comes with a three-year or four-year contract and an in-depth agreement, so there are many factors to consider before signing off on this long-term commitment.
Choosing to lease instead of buying a car can be a great way to drive a newer car with the latest technology and features for less money per month. If you’re ready to lease a car, follow these steps:
Do your research
You can lease just about any kind of car released in recent model years. You will want to narrow down the type and brand you are interested in first while factoring in how the price will fit into your budget. To choose the right set of wheels, pay close attention to your driving habits and how the vehicle will fit into your lifestyle.
When budgeting, prepare to pay a small amount before you drive off the lot to cover taxes and fees. More than that, if you want to lock in lower monthly payments throughout the lease, you can consider putting additional money down.
Next, visit a few dealers and take some test drives. That will help you narrow down what exactly you are looking for. You may want to call ahead and get an idea of what is available and whether test drives are currently allowed.
When you visit dealer lots, remember that you may be met with higher prices. Supply chain issues have not left the leasing market undisturbed and while it still tends to be cheaper than buying, prepare for competition.
Negotiate the terms of your lease
Pretty much everything is up for negotiation during the leasing process. And the negotiation phase is the only chance you will have to get the perks you want in writing. To be the best negotiator, check current pricing on sites like Kelley Blue Book and remember to negotiate more than just price.
A good lease deal is one that will leave you paying as little over the lifetime of the loan as possible — initial down payment included. If negotiation intimidates you, bring a trusted friend to handle the hard conversation. Also, be mindful that increasing vehicle prices could make securing a better lease deal more challenging.
Take advantage of online resources and compare the offers you have to get the best deal. Check out a few dealerships before signing off on your vehicle. Be mindful of the monthly cost, mileage cap, buyout price, money factor and capitalized vehicle cost. Also, look at the fees the lessor is charging, including the acquisition fee, disposition fee and early termination fee, to gauge if it’s comparable to other similar offerings. And don’t forget to inquire about the amount due at signing.
When comparing lease offers, look at the fine print and the vehicle itself. When test driving, pay attention to how the vehicle drives and if it will fit into your lifestyle.
Maintain the car throughout your lease
Remember that you must turn in the car at the end of the lease term. If it’s not in great condition, you might have to pay additional charges.
Before leasing a car, ask about the guidelines on the lease-end condition. These guidelines specify the types of damage you would have to pay for before you return your car.
If the car is significantly damaged, drivers can expect to be charged full market prices for repairs. At the end of the lease, you’ll have a few options. You can either turn in your car to the dealer, purchase the car or lease a new car.
Leasing a car vs. buying a car
Consider your priorities when deciding whether to lease or buy. Reflect on how many miles you drive per year; if you drive a lot, leasing may get expensive. Consider the benefits and drawbacks of each approach.
|Pros of leasing||Cons of leasing|
|Because you are not paying the entire value of the car, you will usually have a lower monthly payment.||At the end of the lease, the car is not yours. You will have to find a new car or buy out your leased vehicle.|
|If driving a newer or high-end car is important to you, your monthly lease payments will be more affordable than making a big down payment to buy it.||You also may have to pay a vehicle turn-in fee at the end of the lease if you don’t lease another car from the dealer.|
|With a car lease, you are usually getting a new car. That can help save on ongoing maintenance costs.||Most leases come with a mileage allowance — if you drive more than your allotment, you’ll pay hefty per-mile charges.|
If leasing is right for you, do your homework, shop around and run the numbers to ensure that you get a lease that fits your driving habits and budget. Pay close attention to your monthly costs and the terms and conditions. To calculate your monthly payment amount, the dealer will analyze the value of the new car versus its residual value. Like with any transaction involving financing, the higher your credit score, the lower your interest rate.