Leasing a car instead of buying it can be a better option for drivers. You can potentially pay less per month and have more options. But there are plenty of factors to consider when leasing a car. Bankrate put together nine traps to avoid when car leasing. Here’s what you need to know.
1. Potentially expensive mileage restrictions
The Federal Highway Administration states that the average U.S. driver goes about 13,500 miles per year. That’s higher than most car leases’ average annual mileage cap, which is around 10,000. Kelley Blue Book estimates mileage penalties range from 10 to 25 cents per mile after that annual cap. Knowing how much you plan to drive per year is important to keep from paying too much in mileage restrictions.
2. Early termination costs
Similar to going over your mileage restriction, you may have to pay a stiff price if you want to end the lease early. The cost could be the difference between what you’ve already paid for car leasing and the car’s depreciation. That could be thousands of dollars.
As an example, you’re leasing a car that’s $35,000, and after three years, you’ve paid $18,000—the car’s depreciated by $12,000. You may be on the hook for the $5,000 difference. You may also need to pay taxes and fees, late charges, parking tickets, and any outstanding monthly payments. When car leasing, make sure you know how much you’ll owe if you don’t finish the term of your lease.
3. Low residual value
Residual value marks how much the car is worth when you’re done leasing. Using the $35,000 car example, the lender may agree that it’ll be worth $20,000 after three years. Your monthly payments will be calculated from there to cover the loss. That means monthly payments of $416.67 before taxes and fees.
If the residual value is a lot lower at the end of the lease term than at the beginning, car leasing can get expensive very quickly.
4. An advertised price that requires a huge down payment
A low monthly payment can be attractive for leasing a car. But that could come at a high price for a down payment. To qualify for low monthly payments for car leasing, you could be on the hook for hundreds to thousands of dollars more upfront. You should be skeptical of a low monthly payment for car leasing.
5. The monthly payments for buying vs. leasing
A selling point for some car dealers to attract potential buyers to car leasing is the lower monthly payments of leasing compared to buying the car. It may seem more financially prudent at the time, but it is important to remember that you have to return the car at the end of the lease. When you buy the car, you own it after the monthly payments finish.
6. Ignoring the cost of the car
Car leasing does mean you can make smaller monthly payments than buying. But you should still pay attention to the price of the car. You may have lower monthly payments, but depreciation could mean you end up paying more at the end of the lease.
7. Fees at the beginning and end of the lease
There are lots of fees that can be included when car leasing. Acquisition fees are one-time fees lenders may charge to come up with the lease and can cost between $400 to $900. Depending on the state you live in, sales taxes and license fees may also be included.
When the lease finishes, you could have the option to buy the car instead of returning it to the lender, also known as the price to buy out. You could also owe end-of-lease fees to cover the cost of cleaning and reconditioning, administrative fees, transportation, storage, and a vehicle inspection. Wear-and-tear fees to cover lost equipment or wear beyond the terms of the lease may be included as well. You’ll want to check the lease for specifics on all of these different costs before signing.
8. A longer-term to get a lower monthly payment
Negotiating a lower monthly lease payment with the lender may sound good but could come at the cost of extending the lease. You aren’t actually saving any money in this case. Your monthly cost may be lower per month, but you’ll pay more in interest for the longer lease duration.
9. The money factor
Unlike an auto loan, there is no APR regarding a car lease. Instead, there is the “money factor.” Like an interest rate, the money factor determines the finance charges you will pay. It’s expressed as a decimal, and you’ll need to multiply it by 2,400 to figure out the percentage. As an example, a money factor of 0.0025 converts to 6%. It’s important to know that before signing your lease.