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9 traps in car leasing that you should stay clear of in 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 writes about auto loans.







Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since late 2021. They are committed to helping readers gain confidence to manage their finances through providing precise, well-researched and well-researched content that break down complex subjects into digestible chunks.









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The idea of leasing a car might seem like a good idea initially However, leases often are accompanied by a myriad of caveats and drawbacks that the negatives exceed the benefits of the agreement. If you're thinking of leasing a car rather than owning one, be aware of what you are getting into. Unlike owning a car, which you could sell should you wish the opportunity to do so, leasing comes with a legally binding agreement -which means you'll need to hold on to the car until your term ends. Here are nine traps you could fall into while leasing an automobile. 1. Limitations on mileage that could be costly The majority of leases have a cap on the number of miles you can drive on the car each year. As a reference point, U.S. drivers average 13500 miles a year, according to the Federal Highway Administration. Certain car leases, specifically ones with low monthly installments, include annual mileage caps of 10,000 miles or less according to Matt DeLorenzo, a senior managing editor at Kelley Blue Book. Based on the type of car you're driving, expect to pay a penalty ranging between 10 and $25 cents per mile in the event that you exceed your annual cap. The more expensive of the vehicle and the more expensive the penalty. If the cost is $25 cents per mile, and you go over the limit by 3,000 miles per year, you're looking at a hefty $750 in added cost. The lesson to take away: If you're considering going the leased car route, estimate how many miles you drive on average each year to ensure you know how much the lease will cost you when you exceed the mileage cap. 2. Early termination fees If you wish to end your lease early it could be necessary to pay a fair amount to get out of the contract. It is contingent on the terms of your lease and you may have to pay for the difference between the amount that the car is depreciating and what you've already spent on it. In some instances, this charge might be several thousand 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 that's your situation, you could be required to pay the difference between what you've already paid, $18,000 as well as the amount the car has depreciated, $21,000. So, you'll be responsible for $3,000. The early termination fees can include taxes and a , which can help offset the expense for the lender to sell the vehicle. The borrower is also responsible for paying off any late charges or parking tickets, as well as any outstanding monthly payments. Takeaway: Read the fine print of early termination clauses, which DeLorenzo recommends. "Find out exactly how much you'll need to pay if the lease does not go to term," he says. 3. Low residual value. The residual value represents how much the car will be worth at the end of your lease term. Let's say the lender thinks that the $30,000 car you're leasing now will be worth $15,000 within three years. The monthly payment will be calculated in order to cover that $15,000 loss in value, so a 36-month lease amounts in monthly payment of $416.67 which does not include the interest, taxes or charges. What is the residual value? It is the agreed-upon value of the car at the time the lease ends. The residual value includes depreciation. 4. An advertised price that requires the payment of a large down-payment. If you find a lease payment advertised as being under $200, be certain to research and be aware of what you're engaging in, says DeLorenzo. In most cases, these prices equate to massive down payment. It is important to know how much you are being required to pay in order to qualify for low monthly payments. "A $5,000 upfront cost for a lease of four years adds more than $100 to the advertised monthly installment," DeLorenzo says. Takeaway: There is usually a catch if a lease has low monthly payments: a hefty down payment. 5. The monthly installments for buying vs. leasing Other dealers could try to entice you to lease by comparing the monthly payments for the two, and what your payments could be if you chose the leasing option. Remember: when you buy a car, you get to keep it until the conclusion of your . If you lease, you have to return the vehicle. Beware of being misled when dealers try to make comparisons between apples and oranges and explain that it's more economical leasing a car. 6. Ignoring the cost of the vehicle Just that you lease does not mean that you do not need to be concerned about the cost of the car. It's still important, since what you are paying to lease the car is mostly contingent on the price of the vehicle and its depreciation rate. It is important to note that the price and value of your car are important when leasing. 7. The fees at the beginning and the end of the lease. Prior to you sign a lease, be certain you are aware of charges. This could include: Acquisition fee: Also called an administrative or bank charge it is a one-time fee charged by lenders to set up the lease. The amount could range from $400-$900. Taxes on sales and licenses: This might not be included in your monthly installment dependent on the state that you reside in and your particular contract you signed, so make certain to review the small print. Cost to buy-out: When your lease ends you'll have the option to purchase the vehicle in lieu of it being returned to your lender. Costs associated with the end of lease: If you decide to take the car back then you'll be responsible for paying end-of-lease fees, also known as an disposition fee. It could include inspection of the vehicle, cleaning and reconditioning, storage costs, transportation and administrative fees. Wear-and-tear charges: You may be charged for lost equipment or if your vehicle suffers wear and tear that isn't covered by the agreement to lease. "Check out the specific terms regarding what constitutes normal wear and tear' at lease expiration, and what is your obligation for repairs or maintenance after lease termination," DeLorenzo says. What you should know is that the cost of leasing a vehicle goes beyond the monthly installment. Examine all the costs involved before signing on the line including those that could result from breaching 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 get your monthly payments down. They call back, letting know that , as it turns out they could reduce your monthly payments by extending the lease. In reality, you're not making any savings. While a longer lease term could mean that you pay less per month, you'll also pay more interest during the lease. Beware of being deceived by a smaller monthly payment that comes with an extended lease period. If the lender suggests stretching the term, you'll pay more interest in the end. 9. The money element While there's no APR when it comes to a car lease but there are financing costs. 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 will pay in financing charges. It is as you'd expect: the greater the value of the money factor, the greater the amount you'll have to be charged. Contrary to interest rates, the money factor is calculated in decimal. To determine the amount of your financial charges in percentage, multiply the money factor by 2,400. So, if your money factor is .0025, that's 6 percent. Takeaway: When shopping for a lease for an automobile, find out what the cost factor is. Steps to follow Avoid falling into one of these car leasing traps with these simple steps: Know your requirements: When deciding whether a car lease is the right choice for you, take into consideration the number of miles you drive every year, the amount you are able to afford, and whether leasing a car would fit with your preferences in lifestyle, financial goals and lifestyle. Check your credit: 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, speak to different lenders regarding their terms and conditions based on your credit. Negotiate what you can however: While there are items that you aren't able to negotiate, such as the acquisition fee and remaining value can possibly negotiate the disposition fee or buyout price. Check the fine print carefully There may be hidden charges and lease limitations that may not be apparent when you're looking around. Before you sign on the dotted line, be sure to pore over the details. The key is understanding the mechanics of leasing a car and being aware of cost, you will be able to avoid the common lease traps, and also save cash. In addition, you should be vigilant when it comes to leasing issues to stay away from it is recommended to plan to ahead of time to ensure that you go into the leasing department with confidence and knowledge. Learn more


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Written by Contributing writer

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



Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are dedicated to helping their readers gain the confidence to manage their finances by providing concise, well-studied and well-informed facts that break down otherwise complex subjects into digestible pieces.






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