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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 write about car loans.

Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain the confidence to control their finances through providing concise, well-studied information that break down 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 pitfalls that the drawbacks outweigh any benefits associated with the arrangement. Even if you’re considering leasing a car instead of owning you should still be vigilant about what you are getting into. In contrast to owning a car which you could sell if you’d like, leasing leaves you with legal binding contractand you’ll have to hold onto the car until the lease expires. There are nine traps that you’re at risk of falling into when leasing the car. 1. Limitations on mileage that could be costly Many leases include a cap on the number of miles that you can put on the car each year. As a reference point, U.S. drivers average 13500 miles a year, according to the Federal Highway Administration. Certain leases for cars, particularly those touting low monthly payments with annual mileage caps of 10,000 miles or less, says Matt DeLorenzo, a senior managing editor at Kelley Blue Book. The type of car you’re driving, you should expect to be charged a penalty that ranges between 10 and 25 cents per mile if you go over your annual limit. The higher the price tag of the vehicle and the more expensive the fine. If your fine is 25 cents for each mile, and you go over the limit by 3,000 miles over a year, you’re looking at an astronomical $750 in additional cost. Consider this: If you’re thinking of going down the lease approach, determine how many miles you average per year to ensure you know how much it will run if you go over the limit of mileage. 2. Early termination costs Should you decide to terminate your lease early it could be necessary to pay a pretty penny to be able to exit the lease. It’s contingent upon the lease terms, but you might be required to pay the difference between the amount the car is depreciating and what you have already paid for it. In some cases, this charge might be many thousand dollars. For instance, suppose you lease a $40,000 car. In the course of three years you’ve spent $18,000. But, the vehicle has depreciated by $21,000. If this is your situation, you could need to pay the difference between what you’ve already paid, which is $18,000 and the amount that the vehicle has depreciated by, $21,000. This means you’d be in the pocket of the sum of $3,000. Early termination costs could also include taxes as well as a fee , that helps to offset the costs to the lender to purchase the vehicle. The borrower is also responsible to pay any late charges, parking tickets and any remaining monthly payments. Takeaway: Read the fine print on early termination clauses, which DeLorenzo recommends. « Find the exact amount you’ll need to pay if your lease doesn’t run to its end, » he says. 3. Low residual value. The residual value is how much the car will be worth at the conclusion of your lease. Let’s say the lender believes that the car you’re leasing today could be valued at $15,000 in three years’ time. Your monthly payments will be calculated to cover that $15,000 loss in value and so a lease for 36 months amounts with monthly installments of $416.67, not including interest or any taxes and charges. Takeaway: Residual value is the agreed-upon value of the car at the time the lease expires. The residual value also includes depreciation. 4. A price advertised that demands the payment of a large down-payment. If you see a monthly lease cost advertised as under $200, be sure to do your homework and understand what you’re being enticed by, says DeLorenzo. In most cases, these prices are equivalent to huge down payment. You should be aware of the amount you’re requested to deposit to be eligible for such low monthly costs. « A $5,000 upfront fee for a lease of four years increases by more than $100 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 payments for purchasing vs. leasing Some dealerships may be trying to lure you into a lease by comparing the monthly payment for each, and what the monthly payment could be if you chose the leasing route. When you purchase an automobile, you are entitled to keep it until the time you have reached the . When you lease, you must to return the vehicle. Don’t fall for it when dealers try to make comparisons between apples and oranges and tell you that it’s more economical it is to lease an automobile. 6. Doing nothing to reduce the cost of the vehicle Just because you are leasing does not mean you don’t have to worry about the price tag of the vehicle. It’s still a matter of concern, as the cost you pay to lease the car is mostly contingent on the cost of the car and its depreciation rate. What you should take away is that the price and worth of your vehicle do matter when leasing. 7. Fees at the start and at the end of the lease. Before signing a lease make certain you are aware of charges. These might include: Acquisition fees: Also called an administrative fee or bank fee it is a one-time fee that lenders charge to set up the lease. The amount can run anywhere from $400-$900. Taxes on sales and licenses are not included in your monthly installment depending on the state you reside in and your specific contract, so be sure to review the specifics. Cost to buy-out when your lease is over, you will be able to buy the car 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 paying end-of-lease fees which is also known as a disposition fee. This might include vehicle inspection cleaning and reconditioning, storage costs, transportation and administrative charges. Wear-and-tear fees: You might be charged for the loss of equipment or if the vehicle suffers wear and tear that isn’t covered by the agreement to lease. « Check out the specific language on what constitutes ‘normal wear and tear’ when lease end, and what your responsibility is for repairs or maintenance after the time of lease termination » DeLorenzo says. It is important to note that the expense of leasing a car is beyond the monthly installment. Review all of the costs involved before signing on the line and that includes any that might come with breaching the terms of the lease. 8. A longer-term lease that gives you a lower monthly payment Let’s say you contact the lender to get your monthly payment down. They return, letting you that they have discovered that they could lower your payments by extending the lease. But the truth is that you’re not saving any money. Although a longer lease period can mean you will pay less per month, you’ll also incur more interest throughout the lease. Beware of being deceived by a lower monthly installment that comes with an extended lease term. If the lender suggests stretching the term, you’ll pay more interest over the long run. 9. The money element While there’s no APR with regards 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 is the determining factor for how much you’ll have to pay for financing charges. It is as you’d expect: the higher the money factor, the more you’ll have to pay. Contrary to interest rates that are based on the money factor, it is calculated as a decimal. To determine the cost of your financing as a percentage, multiple 2400 times the amount of money you have to pay by. So, if your money factor is .0025 6.5%, that’s 6 percent. Takeaway: When shopping for a lease on the car, inquire about what the cost factor is. Next steps Protect yourself from falling into one of these car leasing traps with these simple steps: Know your requirements: When deciding if a lease on a car is the best option for you, think about how many miles you drive every year, what you are able to afford, and how leasing a car is compatible with your needs in lifestyle, financial goals and lifestyle. Examine your credit score: Going over your credit file prior to receiving offers could help you have more leverage to negotiate the terms you want. Compare rates: To find the best rates, talk to lenders about their terms based on your credit. Negotiate as much as you can do: Although there are things you can’t negotiate, such as the purchase fee and the residual value, you may potentially negotiate the disposition fee or buyout price. Be sure to read the fine print There may be hidden charges and limits to your lease that might not be revealed when you’re shopping around. Before signing on your dotted line make sure to study the fine print. It is crucial to understand how leasing a car works and being aware of the expenses, you can steer clear of common lease traps, and also save cash. In addition, you should be alert to leasing pitfalls to steer clear of it is always recommended to plan to plan ahead to ensure that you enter the leasing office with confidence and knowledge. Find out more

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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 writing and editing for Bankrate since late 2021. They are dedicated to helping their readers to manage their finances by providing concise, well-studied and well-informed data that can break otherwise complex topics into manageable bites.

Auto loans editor

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