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9 traps in car leasing that you should avoid Part Of leasing a Vehicle In this series Leasing a Vehicle
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6 min read The book was published on May 5, 2022.
Writen by Jackie Lam Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie write about car loans.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain the confidence to control their finances with precise, well-researched and well-researched content that break down complex subjects into bite-sized pieces.
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Leasing a car may seem like a good idea at first glance, but often leases are accompanied by a myriad of caveats and pitfalls that the drawbacks overshadow any advantages associated with the agreement. Even if you’re considering leasing a car rather than having one, you must be vigilant about the terms you’re signing. In contrast to owning a car which you could trade in if you’d like, leasing leaves you with an legally binding agreementwhich means you’ll need to hold on to the car until your term expires. There are nine traps that you’re at risk of falling into when leasing a car. 1. The potential for expensive mileage limitations The majority of leases have limits on the number of miles you can drive on your car every year. For reference, U.S. drivers average 13500 miles a year, according to the Federal Highway Administration. Some car leases, especially ones with low monthly installments with annual mileage caps of 10,000 miles or less as per Matt DeLorenzo, a senior managing editor at Kelley Blue Book. The kind of car you’re driving, you should expect to be charged a penalty that ranges between 10 and $25 cents per mile if you exceed your annual limit. The more expensive the cost of the vehicle is, the greater the penalty. If the cost is $25 cents per mile, and you exceed the cap by 3,000 miles over a year, you’re looking at an astronomical $750 in additional costs. The lesson to take away: If you’re thinking of going down the lease approach, determine how many miles you travel on average every year to ensure you are aware of the amount it will run you in the event that you exceed the mileage cap. 2. Costs for early termination if you want to end your lease early it could be necessary to pay a pretty penny to be able to exit the contract. It is contingent on the terms of your lease and you may have to pay for the difference between how much the car has depreciated and what you have already paid for it. In some instances the amount could be several thousand dollars. For instance, suppose you lease a $40,000 car. After three years, you’ve spent $18,000. But, the vehicle has depreciated by 21,000. If that’s your situation, you may need to pay the difference between the amount you’ve already paid, $18,000, and the amount the car depreciated $21,000. That means you’ll be on the hook for $3000. The early termination fees can comprise taxes and a that helps to offset the costs for the lender to sell the vehicle. You will also be responsible to pay any late fees or parking tickets, as well as any unpaid monthly installments. Be sure to read the fine print on early termination clauses, DeLorenzo recommends. “Find out exactly how much you’ll be required to pay if your lease doesn’t run to the end of its 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 suppose that the lender believes that the car you’re leasing right now will be worth $15,000 in three years’ time. The monthly payment will be calculated to cover that $15,000 loss in value, so a 36-month lease is equivalent to monthly payments of $416.67 without interest or any taxes and charges. Takeaway: Residual value is the agreed-upon value for the car at the time the lease comes to an end. The residual value includes depreciation. 4. A advertised price that calls for an enormous down payment. If you find a lease that is advertised at less than $200, make certain to research and know what you are engaging in, says DeLorenzo. Often, these low prices equate to massive down payments. It is important to know how much you are being required to pay in order to qualify for low monthly payment. “A $5,000 upfront fee on a four-year lease adds more than $100 to the advertised monthly payment,” DeLorenzo says. It is common to find an issue if a lease has low monthly payments, namely a hefty down payment. 5. The monthly installments for buying vs. leasing Some dealerships may attempt to convince you to lease by comparing the monthly payment for , and what your payments will be if you choose the leasing option. Remember: when you buy a car, you get to own it at the end of your . With leasing, you need to return the car. Beware of being misled when a dealer tries to contrast apples with oranges, and then tell you how much more profitable leasing a car. 6. Doing nothing to reduce the cost of the car just that you lease doesn’t mean you don’t need to think about the price tag of the car. It’s still important, since what you are paying to lease it largely depends on the price of the vehicle and its depreciation rate. Takeaway: The price tag and worth of your vehicle do matter when leasing. 7. The fees at the beginning and end of the lease. Prior to you sign a lease, be certain you are aware of the fees. This could include: Acquisition fee: Also known as an administrative or bank charge, this is a one-time fee charged by lenders to tie the lease together. The amount could range from $400-$900. Sales taxes and license fees may not be included in your monthly installment dependent on the state that you live in and the specific contract, so be sure to check the specifics. Cost to buy-out when your lease is over, you will be able to purchase the car rather than returning the vehicle to its lender. End-of-lease fees: If you decide to return the car then you’ll be responsible to pay the end-of-lease charges or an disposition fee. This might include vehicle inspection, cleaning and reconditioning, storage, transportation , as well as administrative costs. Wear and tear fees: You could be charged for the loss of equipment or if the vehicle is damaged beyond the scope of the agreement to lease. “Check for the specifics regarding what constitutes normal wear and tear’ when lease termination, and also what your responsibility is for any repairs or maintenance at lease termination,” DeLorenzo suggests. It is important to note that the expense of leasing a car goes beyond the monthly payment. Examine all the costs involved before signing on to the contract, and that includes those that could result from breaking the terms of the lease. 8. A longer term to get an affordable monthly installment Let’s say you contact the lender to negotiate your monthly payments down. They respond, letting you know that lo and behold they could get your payments down by extending the lease. But the truth is that you’re not making any savings. While a lease with a longer term can mean you will pay less every month, you’ll incur more interest throughout the lease. Beware: Don’t get fooled by a lower monthly payment which is due to the longer lease period. If the lender suggests stretching the term and you’re paying more interest over the long run. 9. The money factor Although there is no APR when it comes to a lease on a car however, there are finance charges. They are referred to as the “money factor.” The money factor functions like an interest rate and it determines how much you will pay in financing charges. It is as you’d expect: the higher the amount of money factor, the more you’ll pay. Contrary to interest rates and other factors, the money factor is expressed in decimal. To figure out the cost of your financing in percentage, multiply your money factor with 2,400. For example, if your factor is .0025 6.5%, that’s 6 percent. Takeaway: When shopping for a lease for the car, inquire about what the price factor is. Steps to follow Avoid falling into these car leasing traps with these easy steps: Understand your requirements: When making a decision on whether a lease for a car is right for you, consider the amount of miles you travel every year, what you are able to afford, and whether leasing a car will fit in with your personal preferences, lifestyle and financial goals. Review your credit report: Looking at your credit report before you receive offers can give you more leverage when negotiating the terms you want. Compare rates: To find the best rates, talk with different lenders regarding their terms, that are based on your credit. Negotiate what you can: While there are some items that you aren’t able to negotiate, such as the acquisition fee and remaining value can be able to negotiate the disposal fee or the purchase price. Check the fine print carefully There are hidden charges and lease limitations that may not be apparent when you’re shopping around. Before signing on the dotted line, make certain to read the specifics. The key is understanding the mechanics of leasing a car and knowing the cost, you will be able to avoid the common lease traps, and also save yourself money. Along with remaining alert to leasing-related pitfalls to steer away from, it’s recommended to plan to prepare ahead of time to ensure that you enter the leasing office with knowledge and confidence. Learn more
Written by Contributing writer
Jackie Lam is a contributing writer for Bankrate. Jackie writes about auto loans.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to take control of their finances by providing precise, well-studied data that can break otherwise complex subjects into digestible pieces.
Auto loans editor
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