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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 minutes read. published May 5, 2022.

The story was written by Jackie Lam Written by Contributing writer

Jackie Lam is a contributing writer for Bankrate. Jackie is a writer on auto loans.

The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to manage their finances with precise, well-researched and well-researched content that breaks down otherwise complex subjects into digestible chunks.

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Leasing a car may seem to be a great idea at first blush, but often leases are accompanied by a myriad of caveats and risks that the disadvantages exceed the benefits of the deal. Even if you are considering leasing a car instead having one, you must be vigilant about the risks you’re taking. As opposed to owning a vehicle, which you could sell should you wish, leasing leaves you with an legally binding agreementand you’ll have to hold onto the car until the lease expires. Here are the nine traps you’re at risk of falling into when leasing an automobile. 1. Limitations on mileage that could be costly Most car leases come with limits on the number of miles you can put on the car each year. For reference, U.S. drivers average around 13,500 miles per year, as per the Federal Highway Administration. Some car leases, especially those touting low monthly payments, include annual mileage caps of less than 10,000 miles as per Matt DeLorenzo, a senior managing editor at Kelley Blue Book. Based on the type of car you’re driving, you can expect to pay a penalty that ranges from 10 cents to $25 cents per mile in the event that you exceed your annual limit. The more expensive the cost of the car is, the greater the fine. If the fine is 25 cents for each mile, and you exceed the cap by 3,000 miles per year, you’ll be looking at an astronomical $750 in additional cost. Takeaway: If you are contemplating going down the lease car option, calculate the number of miles you drive on average each year to ensure you know how much the lease will cost you if you go over the mileage cap. 2. Early termination costs Should you decide to terminate your lease earlier and you want to get out of the lease early, you may have to pay a fair amount to be able to exit the agreement. It’s contingent upon the terms of your lease, but you might have to pay for the difference between the amount that the car is depreciating and the amount you spent on it. In certain cases, this charge might be thousands of dollars. For instance, suppose you lease an automobile worth $40,000. In the course of three years you’ve spent $18,000. But, the vehicle has been depreciated by $21,000. If this is the case, you could be required to pay the difference between the amount you’ve already paid, which is $18,000 as well as the amount the vehicle has depreciated by, $21,000. So, you’ll be on the hook for $3000. Early termination costs can also include taxes as well as a fee , which helps offset the cost for the lender to sell the vehicle. You will also be responsible to pay any late charges such as parking tickets or outstanding monthly payments. Be sure to read the fine print of early termination clauses, which DeLorenzo suggests. «Find out exactly how much you’ll need to pay if your lease doesn’t go to its end,» he says. 3. Low residual value The residual value is what the car will be worth at the end of your lease term. Let’s say the lender believes that the car you’re leasing today will be worth $15,000 within three years. The monthly payment will be calculated to compensate for that $15,000 loss in value and a lease of 36 months amounts with monthly installments of $416.67 without interest or any taxes and fees. Takeaway: Residual value is the agreed-upon value of the car at the time the lease comes to an end. The residual value is inclusive of depreciation. 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 conduct your research and know what you are engaging in, says DeLorenzo. Most of the time, these low rates are equivalent to huge down payment. You will want to check what amount you’re requested to deposit to be eligible for low monthly costs. «A $5,000 upfront cost on a four-year lease will add more than $100 to the advertised monthly installment,» DeLorenzo says. The lesson: There’s usually an issue if a lease comes with lower monthly payments: an enormous down payment. 5. The monthly installments for purchasing in comparison to. leasing Other dealers may be trying to lure you into a lease by comparing monthly payments for each, and what the monthly payment could be if you chose the leasing option. Rememberthat when you purchase a car, you get to keep it until the end of your . If you lease, you have to return the vehicle. Beware of being misled when dealers try to compare apples to oranges, and then tell you how much more financially savvy it is to lease a car. 6. Doing nothing to reduce the cost of the vehicle Just because you are leasing does not mean that you do not need to think about the price tag of the car. It’s still important, since what you are paying to lease the car is mostly contingent on the price of the car as well as the rate of depreciation. Takeaway: The price tag and the value of your vehicle will be a factor when you lease. 7. Fees at the beginning and at the end of the lease Before the lease is signed, be sure you’re aware of all charges. These might include: Acquisition fees: Also called an administrative or bank fee it is a one-time fee charged by lenders to put the lease together. The cost can range from $400-$900. Taxes on sales and licenses: This might not be included in the monthly payment based on the state you reside in as well as the particular contract you signed, so make sure to check the small print. Cost to buy-out If your lease expires you’ll have the option to purchase the vehicle rather than returning the vehicle to its lender. Costs associated with the end of lease If you choose to sell the vehicle to the lender, you’ll be accountable for the payment of end-of-lease costs which is also known as the disposition fee. It could include inspection of the vehicle cleaning and reconditioning storage costs, transportation and administrative fees. Wear and tear fees: You could be charged for lost equipment, or if the car suffers wear and tear beyond what’s covered in the agreement to lease. «Check out the specific language regarding what constitutes normal wear and tear’ at lease expiration, and what your responsibility is for repairs or maintenance following lease termination,» DeLorenzo suggests. It is important to note that the expense of leasing a vehicle goes beyond the monthly payment. Review all of the expenses before signing the dotted line, which includes the possibility of breaking the lease’s terms. 8. A longer-term lease that gives you a lower monthly payment Let’s say you talk to the lender to bring your monthly installments reduced. They respond, letting you know that , as it turns out they could reduce your monthly payments by extending the lease. The truth is you aren’t saving any money. Although a longer lease period can mean you will pay less each month, you’ll also be paying more interest over the course of the lease. Takeaway: Don’t be fooled by a smaller monthly payment due to the longer lease period. If the lender suggests stretching the term and you’re paying more interest in the long term. 9. The money factor While there’s no APR when it comes to a car lease however, there are finance charges. They are referred to as the «money factor.» The money factor functions like an interest rate and is the determining factor for how much you’ll have to pay for fees for financing. As you might expect, the higher the money factor, the greater the amount you’ll be charged. Contrary to interest rates and other factors, the money factor is calculated in decimal. To figure out the amount of your financial charges 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 on a car, ask what the money factor is. The next step is to protect yourself from stumbling into one of these car leasing traps by following these simple steps: Know your requirements: Before making a decision on whether a lease for a car is the best option for you, take into consideration how many miles you drive each year, how much you can reasonably afford and how leasing a car would fit with your preferences as well as your lifestyle and financial goals. Review your credit report: Looking over your credit file before you receive offers can give you more leverage to negotiate the terms you want. Find a comparison: To get the best rates, talk with different lenders about their terms based on your credit. You can negotiate what you want to: While there are some items that you aren’t able to discuss, such as the acquisition fee and residual value, you could be able to negotiate the disposal fee or buyout price. Check the fine print carefully There may be hidden charges and limitations to the lease which may not be disclosed when you’re shopping around. Before signing the dotted line, be sure to study the specifics. It is crucial to understand the mechanics of leasing a car and being aware of the cost, you will be able to avoid common leasing traps and save yourself money. While also being vigilant when it comes to leasing-related pitfalls to steer away from it is prudent to be prepared to prepare ahead of time to be able to enter the leasing office with confidence and knowledge. Learn more

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Written by a 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 writing and editing for Bankrate from late 2021. They are dedicated to helping their readers to take control of their finances by providing concise, well-studied and well-informed data that can break complex subjects into digestible pieces.

Auto loans editor

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