9 car leasing traps you should avoid

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If you’re considering leasing a car, what seems like a good idea might come with caveats and pitfalls that make it so the cons outweigh the pros. Just because you’re leasing a car instead of owning doesn’t mean you should be any less vigilant about what you’re getting into. Unlike owning a car, which you could sell if you’d like, leasing leaves you with a legally binding agreement, and you’d need to hold onto the car until your term ends. Here are 9 traps you risk falling into when leasing a car:

9 car leasing traps to avoid

1. Potentially expensive mileage restrictions

Most car leases come with a cap on the number of miles you can put on the car in a given year. U.S. drivers average about 13,500 miles per year, according to 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, a senior managing editor at Kelley Blue Book. And depending on the type of vehicle you’re driving, expect to pay a mileage penalty of anywhere from 10 cents to 25 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 a year in added costs.

Takeaway: If you’re considering going the leased car route, estimate how many miles you average per year. If there’s been a shift in how much you drive, for instance, you now work from home and are driving less, or you have a new job that comes with a longer commute, factor that in.

2. Early termination costs

Should you want to end your lease early, you might have to pay a pretty penny to get out of your agreement. It depends on the terms of your lease. You might have to pony up for the difference between how much the car has depreciated and what you’ve 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), or $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. And don’t forget, you’ll also be responsible for paying off late charges, parking tickets and any outstanding monthly payments.

Takeaway: 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.

Takeaway: The lower the residual value of a car, the higher your monthly payments will be. Keep this in mind, and calculate how much extra you’d pay to cover a car with a low residual value.

4. 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’re getting into, DeLorenzo says. Often, these low prices equate to massive down payments. You’ll want to check how much you’re being asked to put down in order to qualify for such low monthly payments.

“A $5,000 up-front charge on a four-year lease effectively adds more than $100 to the advertised monthly payment,” DeLorenzo says.

Takeaway: There’s usually a catch if a lease comes with low monthly payments: a hefty down payment.

5. 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.

Takeaway: 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’re leasing doesn’t mean you don’t need to worry about the price tag of the car. It still matters, because what you’re paying to lease it largely depends on the cost of the vehicle and its depreciation rate.

Takeaway: The price tag and value of your car do matter when leasing.

7. Fees at the beginning and end of the lease

Before you sign a lease, be sure you’re well 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, so be sure to read the fine print.
  • Price to buy out. When your lease ends, you’ll 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.

Takeaway: The cost of leasing a car goes beyond the monthly payment. Look into all the costs, including any that might come with breaking the terms of the lease.

8. 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’ll pay less each month, you’ll pay more interest during the lease.

Takeaway: Don’t be fooled by a lower monthly payment that comes with a longer lease term. The average lease term is two to four years. If the lender suggests stretching that term, you’ll pay more in the long run.

9. The money factor

While there’s no such thing as an 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’ll pay in finance charges. As you might expect, the higher the money factor, the more you’ll 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 2400. So if your money factor is .00250, that’s 6 percent.
Takeaway: This isn’t something that a lender discloses. When shopping for a lease on a car, ask what the money factor is.

Next steps

Here’s what you can do to protect yourself from stumbling into one of these car leasing traps:

  • Know your needs. When deciding whether a car lease is right for you, consider how many miles you drive in a given 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 buy-out 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 nitty-gritty details.

By understanding how leasing a car works and being aware of the costs, you can avoid common leasing traps.

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Written by
Jackie Lam
Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans.
Edited by
Associate loans editor