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With lower monthly payments than a car loan, leasing can be a more inexpensive way to drive the latest model car. But there are also plenty of drawbacks to consider, which may outweigh the benefits depending on your goals and needs.
Unlike owning a car, which you can sell if you’d like, leasing leaves you with a legally binding agreement — and you need to hold onto the car until your term ends. In addition, there may be annual mileage limitations associated with a lease and costly financial penalties if you exceed that cap.
If you’re considering a lease instead of owning, it’s important to be vigilant and know what you are getting into. Here are nine traps you risk falling into when leasing a car.
- Know your needs: When deciding whether a car lease is right for you, consider how many miles you drive each year, how much you can reasonably afford and how leasing a car would fit with your preferences, lifestyle and financial goals.
- Check your credit: Looking over your credit file before you receive offers can help you have more leverage to negotiate the terms you want.
- Shop around: To get the best rates, talk to different lenders about their terms based on your credit.
- Negotiate what you can: While there are some things you can't negotiate, such as the acquisition fee and residual value, you can potentially negotiate the disposition fee or the buyout price.
- Read the fine print: There are hidden fees and limits to your lease that might not be revealed when you're shopping around. Before you sign on the dotted line, be sure to pore over the details.
1. Potentially expensive mileage restrictions
Most car leases include a cap on the number of miles you can put on the car each year. For reference, U.S. drivers average about 13,500 miles per year, according to 2022 data from the Federal Highway Administration.
Some car leases, especially those touting low monthly payments, include annual mileage caps of 10,000 miles or less, says Matt DeLorenzo of Kelley Blue Book. Depending on the type of vehicle you are driving, expect to pay a mileage penalty of anywhere from 12 cents to 30 cents per mile if you go over your annual cap.
The higher the price tag of the car, the higher the penalty. If your penalty is 25 cents per mile and you exceed the cap by 3,000 miles in a year, you’re looking at a hefty $750 in added costs.
If you are considering going the leased car route, estimate how many miles you average per year to ensure you know how much the lease will cost you if you go over the mileage cap.
2. Planning to end the lease early
Should you want to end your lease early, you might have to pay a pretty penny to get out of the agreement. It depends on the terms of your lease, but you might have to pay the difference between how much the car has depreciated and what you have already paid for it. In some cases, this charge might be several thousand dollars.
Say you’re leasing a $40,000 car. After three years, you’ve paid $18,000. However, the car has depreciated by $21,000. Should that be the case, you might need to pay the difference between what you’ve already paid, $18,000, and the amount the car has depreciated, $21,000. This means you’d be on the hook for $3,000.
Early termination costs can also include taxes and a vehicle disposition fee, which helps offset the cost for the lender to sell the vehicle. You will also be responsible for paying off any late charges, parking tickets and any outstanding monthly payments.
Read the fine print on early termination clauses, DeLorenzo recommends. “Find out exactly how much you’ll need to pay if your lease doesn’t go to term,” he says.
3. Low residual value
The residual value is how much the car is worth at the end of your lease term. Let’s say the lender estimates that the $30,000 car you’re leasing today will be worth $15,000 in three years’ time. Your monthly payments will be calculated to cover that $15,000 loss in value, so a 36-month lease equates to monthly payments of $416.67, not including interest or any taxes and fees.
If the vehicle you choose is one that historically retains its value, and therefore has a higher residual value at the end of the lease, your monthly lease payments will be lower. But if a leasing company decides the car will have a low residual value at the end of the lease — even if that’s not truly the case —your monthly lease payments will be more expensive.
Be sure to do your research on a particular vehicle and its value over time, so that you are knowledgeable when reviewing the terms of a lease and can spot an unreasonably low residual value.
Residual value is the agreed-upon value of the car when the lease ends. To avoid excessive lease payments, look for vehicles that maintain their value and avoid working with leasing companies that set artificially low residual values for vehicles.
4. Falling for an advertised price that requires a huge down payment
When you see a monthly lease payment advertised as being below $200, be sure to do your homework and know what you are getting into, DeLorenzo says. Often, these low prices equate to massive down payments. You will want to check how much you are being asked to put down in order to qualify for such low monthly payments.
“A $5,000 upfront charge on a four-year lease effectively adds more than $100 to the advertised monthly payment,” DeLorenzo says.
Remember, leasing a car is not like buying a car. You could lose a lot of money if you make the mistake of providing a big down payment on a lease and then the car is totaled early on. Your car insurance will reimburse the leasing company for the vehicle, but you’re not going to get your down payment back. That means you’ll be out of a car and the down payment will be lost as well.
There is usually a catch if a lease comes with low monthly payments: a hefty down payment.
5. Only comparing the monthly payments for buying vs. leasing
Some dealers might try to entice you to lease by comparing the monthly payments for buying versus leasing, and how much lower your payments would be if you went the leasing route. Remember: when you buy a car, you get to own it at the end of your loan term. With leasing, you need to return the car.
Don’t be fooled when a dealer tries to compare apples to oranges and tell you how much more financially savvy it is to lease a car.
6. Ignoring the cost of the car
Just because you are leasing doesn’t mean you don’t need to worry about the price tag of the car. It still matters, because what you are paying to lease it largely depends on the cost of the vehicle and its depreciation rate.
The price tag and value of your car do matter when leasing.
7. Not examining all fees
Before you sign a lease, be sure you’re aware of all the fees. These might include:
- Acquisition fee: Also called an administrative or bank fee, this is a one-time fee that lenders charge to put the lease together. The amount can run anywhere from about $400 to $900.
- Sales taxes and license fees: This might not be included in your monthly payment based on the state you live in and the individual contract, so be sure to read the fine print.
- Price to buy out: When your lease ends, you will 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 paying end-of-lease fees, also known as a disposition fee. This might include vehicle inspection, cleaning and reconditioning, storage, transportation costs and administrative fees.
- Wear-and-tear fees: You might be charged for lost equipment, or if the car suffers wear and tear beyond what’s covered in the lease agreement. “Check out the specific language on what constitutes ‘normal wear and tear’ at lease end, and what your responsibility is for any repairs or maintenance at lease termination,” DeLorenzo says.
The cost of leasing a car goes beyond the monthly payment. Review all of the costs involved before signing on the dotted line, including any that might come with breaking the terms of the lease.
8. Taking a longer term to get a lower monthly payment
Let’s say you talk to the lender to get your monthly payment down. They return, letting you know that lo and behold, they were able to get your payments down by extending the lease. The truth is you aren’t saving any money. While a longer lease term can mean you will pay less each month, you will also pay more in money factor during the lease.
Don’t be fooled by a lower monthly payment that comes with a longer lease term. If the lender suggests stretching the term, you’ll pay more interest over the long run.
9. Not comparing money factors
While there’s no APR when it comes to a car lease, there are financing charges. These are known as the “money factor.” The money factor is a lot like an interest rate, and it determines how much you will pay in finance charges. As you might expect, the higher the money factor, the more you will pay.
Unlike interest rates, the money factor is expressed as a decimal. To figure out what your finance charges are as a percentage, multiple the money factor by 2,400. So, if your money factor is .0025, that’s 6 percent.
Your money factor will depend on your credit score. People with excellent credit should get a money factor in the 3 percent to 5 percent range. To get the best money factor possible, especially if you have less than ideal credit, it’s important to shop around and compare the fine print of each offer, including the money factor.
When shopping for a lease on a car, ask what the money factor is.
The bottom line
By understanding how leasing a car works and being aware of the costs, you can avoid common leasing traps and save money. Along with remaining vigilant when it comes to leasing pitfalls to steer clear of it is always wise to take the time to calculate your expected lease costs ahead of time so you can enter the leasing office with knowledge and confidence.