Questions to ask before leasing a car
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Leasing a car lets you rent a vehicle for a few years without the obligation to purchase it. It can be a great way to get a new set of wheels without fully committing financially. It’s particularly good for drivers who clock in less than 15,000 miles a year and won’t risk mileage overages.
But leasing can be complicated. To get the best deal, you should come to the table prepared with a few questions.
10 questions to ask before leasing a car
If you’re thinking of leasing a car, don’t jump at the first offer you see. Set yourself up for success by asking these questions first.
1. What is the amount due when I sign the lease?
Before signing a lease, you should receive a detailed written statement of everything you must or may have to pay. Upfront payments could include a security deposit, title fees, capitalized cost reduction, monthly payments paid at signing and registration fees.
Knowing the amount due when signing off on the lease helps you avoid overspending. Plus, knowing the price breakdown of all extra fees can help you to negotiate better.
The payment you sign off on is typically higher than the sticker price that attracted you, so ask for a list of fees first.
2. How long is the lease?
The leasing company will tell you how many payments the lease includes, how much each payment will be and when the payments are due. The most common lease terms are 24, 36, 48 and 60 months — but you may also find odd terms, like 39 months. Some odd-month deals may be designed to confuse you.
When looking through the lease options, remember that a longer lease offers lower monthly payments, but you will pay more overall.
Weigh your options before agreeing to a lease term and understand exactly how your term will affect your monthly payment.
3. What type of lease am I signing and what happens after it ends?
There are two kinds of leases: open-end and closed-end.
In a closed-end lease, the leasing company sets a total price based on their estimate of the vehicle’s depreciated value. Even if your vehicle depreciates more than expected during a closed-end lease, the only extra costs you are responsible for are excess mileage and wear-and-tear fees. This is the most common type of lease.
In an open-end or finance lease, you will have to pay the difference between the car’s residual value and its actual value at the end of the lease. If the car depreciates more than expected, you may face a hefty charge at the end of the lease.
In both cases, read the fine print so you are not surprised by any additional end-of-lease payments.
Knowing what type of lease you’re signing helps you to better plan for your payments.
4. Can I buy the car at the end of the lease?
If you want to keep your car at the end of the lease, you may have an option to buy it for the residual value or purchase price option included in the lease agreement. But before you move forward, compare the residual value to the car’s retail value to determine if you’re getting a good deal.
Also, assess the vehicle’s condition to determine if it’s in good shape and hasn’t significantly depreciated. You may find that a buyout isn’t worthwhile unless you’re facing steep wear and tear fees or penalties for exceeding the mileage limit.
The lessor may allow you to buy out your lease when the term ends, but you should run the numbers to confirm it makes financial sense.
5. What is the residual value of the vehicle?
A vehicle’s residual value is the value it is estimated to hold at the end of the lease. Leasing companies determine the residual value, though you can get an estimate on Kelley Blue Book.
Knowing this number is helpful because it is a key factor in determining your monthly payments. The higher the residual value compared to the car’s original cost, the lower your monthly payment. Furthermore, some automakers and lessors subsidize residual values as a leasing incentive to make your monthly payment more affordable.
For instance, if your car is worth $20,000 and should be worth $15,000 at the end of the lease, you will have a lower payment than if you choose a $20,000 car expected to be worth $10,000. In the second scenario, the lessor needs to recoup a larger percentage of the car’s value and will charge you more.
Knowing a vehicle’s residual value helps you determine which type of car and which type of financing is best for you.
6. Will there be a wear-and-tear assessment?
Leasing laws require your lessor to tell you whether and how wear and tear will be assessed when you return the vehicle. At the end of your lease, the car will be examined for exterior damage like scratches, dents and windshield cracks, plus interior damage like stains. You will be charged for any excessive damage, though you won’t have to pay for the inspection.
The law also says that wear-and-tear standards must be reasonable. The standards are based on the number of miles you drove and any damage done to the vehicle. If your vehicle has superficial damage, paying for touch-ups before your assessment may be worth it.
Knowing how wear and tear is assessed will help prepare you for any end-of-lease payments.
7. What is the money factor?
The “money factor” represents the total amount you’ll pay in finance charges for the leased vehicle. It’s equivalent to the interest rate you would pay on a new car. It’s usually represented as a small decimal. Multiplying it by 2,400 will show the annual percentage rate you are paying for the lease.
To illustrate, if you’re approved for a lease with a money factor of .0030, it’s equivalent to an interest rate of 7.2 percent.
Your credit score heavily influences the money factor, so improve your score before heading into the leasing office. You can rarely negotiate this number because lending institutions typically set it.
A money factor is not the same as an APR, though it does determine how much you’ll pay on top of your lease amount.
8. What is the lease mileage allowance and what happens when I exceed it?
A lease mileage allowance is the number of miles you may drive without facing additional charges. Leases usually allow 12,000 or 15,000 miles before fees kick in. Excess mileage fees can range from 10 to 25 cents per mile, which adds up quickly.
Understand your mileage allowance and try to anticipate your driving habits during your lease, as any long road trips might cost you. Although the miles allowance is often a negotiable number, changing it will impact your payment.
Exceeding your lease mileage allowance will cost you.
9. What happens if I can’t make a lease payment?
Although few plan to fall behind on lease payments, it is important to understand what could happen if you miss a payment. Typically, a default occurs if you fail to make three or more payments in a row.
Not paying your lease typically leads to additional fees and negatively affects your credit score, but every lessor handles this situation differently. Many companies have grace periods, which you should ask about before signing the lease.
It is also wise to ask about a worst-case scenario where you default. After a certain amount of time, the lessor can repossess the vehicle and, in many cases, charge you an early termination fee. Before signing, find out what that price would be.
All lessors handle default differently, so ask ahead of time to know what penalties could occur.
10. Can the lease be extended?
You can usually request to extend your lease by a few months at the same price, though most lessors have a limit. Even if you are unsure whether you will need to extend your lease, ask whether extending it will change the terms of the original lease or bring potential new costs. Knowing these costs upfront can help you better plan when your lease’s end approaches.
Along with possible lease extensions, ask about termination fees. Companies must disclose under what circumstances the leasing company can demand their vehicle back or can change the terms of the deal.
Asking about lease extensions ahead of time will ensure that you aren’t blindsided with additional costs if you need more time at the end of your lease.
Final considerations to keep in mind before leasing
Leasing a vehicle can be a good choice for drivers interested in driving the newest vehicle options without investing in buying a car. Here are some of the pros and cons to keep in mind when considering a car lease.
- Leasing can be cost-effective. Drivers who don’t drive much and thus won’t exceed a lease’s mileage limits may find leasing a much more cost-effective option than purchasing a new car.
- You can get a new car every few years. If you like driving the latest vehicles with the newest technology, a lease allows you to upgrade every few years when your contract ends.
- Leasing involves restrictions you don’t have when buying a car. When leasing a vehicle, you will face limits on the miles traveled. It’s even more important to keep the car in good condition to avoid additional fees when the contract ends.
- You don’t build equity when you lease a vehicle. If you jump from lease to lease, you won’t be building any equity in your vehicle.
Before heading to a dealer to ask leasing questions, reflect on your driving habits to see if leasing is right for you. A leasing versus buying calculator is a great starting point to see potential savings.
Leasing a vehicle is a big commitment, but it can pay off if you know what you’re getting into. Preparation is key. Ask the right questions and read the fine print of a lease agreement to get the best deal possible.