When you sign a car lease, you agree to drive a vehicle for a fixed number of miles and months. Once the lease term is up, you can return the car and choose to lease a new one, purchase the vehicle or walk away.
Car leasing also allows you to drive a vehicle for a lower monthly payment than buying. According to Experian’s State of the Automotive Finance Market Report for the first quarter of 2023, the average monthly cost of leasing a car is $586, which is $139 cheaper than the average monthly payment of $725 for a new vehicle purchase.
Six Mistakes To Avoid When Leasing a Car
Car leasing can significantly cost you if you’re not careful. Here are some common mistakes to avoid when leasing a car.
Paying a Large Sum Upfront
Putting a sizable down payment upfront can lower your monthly payments, with the money covering a portion of the lease. However, it comes with significant risks. If the leased vehicle is totaled or stolen early in the lease term, the insurance company reimburses the leasing company for the car's value, but you may not recoup your upfront payment.
Essentially, you could lose the money you put down and be left without a car. To mitigate this risk, opting for a lease deal with minimal or no down payment is often more prudent.
Similar to purchasing a car, it's important to negotiate the lease terms to ensure you're getting the best possible deal. Here are some aspects of a lease that you can negotiate:
- Vehicle price: Also known as the capitalized cost, this is the price of the vehicle at the start of the lease. Even though you're not buying the car, the price you negotiate for it affects your monthly payments. A lower price means the car depreciates less over the lease term, which reduces your payments.
- Mileage limit: Most leases limit the number of miles you can drive annually, often 10,000 to 15,000 miles. Exceeding this limit may incur a fee for each extra mile. If you know you'll be driving more than the preset limit, you can negotiate a higher mileage limit upfront. While this can increase your monthly payments, it's usually cheaper than paying the excess mileage fees at the end of the lease.
- Money factor: This is essentially the interest rate of the lease. It's often expressed in decimals, but you can get a more understandable interest rate by multiplying the money factor by 2,400. Lowering the money factor reduces the amount of interest you pay, which lowers your monthly payments.
By understanding each component of the lease and how it affects your payments, you can negotiate effectively and get the best possible deal for your situation.
Leasing for Too Long
Leasing a car for too long can lead to unnecessary expenses and risks. Most car leases are designed to fall within the vehicle's warranty period, which typically lasts for three years. If you lease beyond this period, you may be responsible for significant car repair and maintenance costs once the warranty expires.
Additionally, the longer you lease, the more the vehicle depreciates, which could result in higher monthly payments. It's generally advisable to align the lease term with the warranty period to avoid out-of-pocket repair costs.
Not Getting Gap Insurance
Gap insurance is a crucial component of a car lease that many people overlook. This covers the difference between the car's current market value and the amount you still owe on your lease if the vehicle is totaled or stolen.
Say you lease a car that's worth $30,000. After a year, it depreciates, and its market value becomes $25,000. Unfortunately, you get into an accident, and the car is totaled. Your car insurance provider determines the car's current market value and pays you $25,000. However, under the terms of your lease, you still owe $28,000. This leaves a difference of $3,000 that you're responsible for, which gap insurance can cover.
Without gap insurance, you could be left paying off a significant amount on a car you can no longer use. While it's an additional cost, the financial protection it provides in the event of an accident or theft makes it a wise investment.
Skipping the Maintenance
Skipping maintenance can lead to significant problems with the leased car and result in charges for excessive wear and tear when you return it. Some lease agreements may require you to use specific service centers for maintenance. Ignoring these requirements could violate your lease agreement.
Regular maintenance not only keeps the car in good condition but also helps avoid unexpected repair costs. Always adhere to the manufacturer's recommended maintenance schedule and keep records of all services performed to prevent potential disputes at the end of your lease.
Not Reading the Fine Print
The fine print of a lease agreement contains important details that can significantly impact your leasing experience and costs. It usually includes information about early termination fees, wear and tear standards, maintenance requirements and penalties for exceeding the mileage limit.
Not reading and understanding these details can lead to unexpected costs and complications. For instance, you might be charged for "excessive" wear and tear at the end of the lease if you're not aware of the leasing company's standards. To avoid unpleasant surprises, it pays to thoroughly read and understand the fine print before signing a lease agreement.
Pros and Cons of Leasing a Car
Leasing a car offers several advantages, such as lower monthly payments, the opportunity to drive newer models more frequently and coverage of most repairs under the manufacturer's warranty. However, it also has its drawbacks, including mileage restrictions and the lack of ownership equity.
Before signing a lease agreement, weigh the pros and cons to ensure that leasing aligns with your financial situation, lifestyle and driving habits.
Pros of Leasing a Car
- Lower monthly payments: Compared to loan payments, lease payments are often more affordable because you're only paying for the vehicle's depreciation during the lease term, plus interest and fees — not the entire purchase price of the car.
- Drive newer models more often: By leasing, you can drive a new car every few years. This means you can take advantage of the latest technology, safety features and fuel efficiency advancements without the commitment of buying a new car.
- Warranty coverage: Most leases last two to three years, typically the same length as the manufacturer's warranty. As such, most repairs are covered under warranty during your lease term, reducing your risk of unexpected repair costs.
- Lower upfront costs: Leases often require a lower down payment than buying a car. Some lease deals may even allow you to pay no down payment at all, although this will likely result in higher monthly payments.
- Option to buy: At the end of the lease, you usually have the option to buy the car for a predetermined price if you've grown attached to it. This gives you the flexibility to decide whether you want to keep the car or move on to a new one.
Cons of Leasing a Car
- Lack of ownership: When you lease a car, you're essentially renting it for a set period. At the end of the lease, you must return the vehicle and have nothing to show for the payments you've made.
- Mileage limit: Most leases come with a mileage limit ranging from 10,000 to 15,000 miles per year. If you exceed this limit, you'll have to pay an additional fee for each extra mile, which can add up quickly.
- Early termination fees: If your situation changes and you need to end your lease early, you could face hefty termination fees. These fees can sometimes be as much as the remaining balance on the lease.
- Higher insurance costs: Leased vehicles often require more comprehensive insurance coverage, which can be more expensive than the minimum coverage required when you own a car.
Leasing vs. Buying a Car
Leasing allows you to drive a new car for a specific period without making a long-term commitment. Meanwhile, buying is a path to outright ownership by paying in monthly installments or lump sum. By understanding the differences between the two, you can determine whether you should lease or buy a car.
You don't own the car; you return it at the end of the lease.
You own the car and can keep it as long as you want.
Usually includes the first month's payment, a refundable security deposit, down payment, taxes, registration and other fees.
Usually includes the cash price or a down payment, taxes, registration and other fees.
Generally, lease payments are lower because you’re only paying to use the car.
Loan payments are usually higher because you're paying off the entire purchase price.
You must return the vehicle at the end of the lease unless you choose to buy it.
You can sell or trade in your vehicle at any time.
Leases limit the number of miles you can drive, but you can negotiate a higher mileage limit.
There’s no mileage limit, so you can drive as many miles as you want.
Wear and tear
You may be charged extra for excessive wear and tear.
As the owner, you don't have to worry about wear and tear, but it could lower your car's trade-in or resale value.
The vehicle must be returned in its original condition.
You're free to modify or customize the vehicle as you see fit.
How to Lease a Car
Leasing a car is ideal if you enjoy driving the latest models for a lower monthly payment. Once you’ve decided that this is the best option for you, take care to follow these specific steps.
Determine your needs
Start by asking yourself some important questions, including:
- What type of vehicle do you require? A compact car may be better for city driving, while SUVs are preferable for family outings.
- How many miles do you typically drive in a year? Your mileage needs will impact the lease terms as leases have a mileage limit. Going over this limit can result in additional fees.
- What features are important to you? Consider the important features you want the car to have, such as fuel efficiency, safety, technology and cargo space.
Do your research
Once you've identified your needs, start looking for vehicles that fit your criteria. Look at various models, read reviews and compare lease deals from different dealers. Don't just focus on the monthly payment. Consider the total cost of the lease, which includes the down payment, monthly payments, taxes and potential end-of-lease fees.
Take test drives
Before committing to a lease, you should test drive the vehicle. This is your chance to see if it meets your expectations in terms of comfort, performance and features. Check the visibility, seating comfort, cargo space, ease of parking and any other factors that are important to you.
Negotiate the terms
Don't be afraid to negotiate the terms of a lease and ask for a better deal. Some of its components are negotiable, including the capitalized cost, mileage limit and money factor. By negotiating these terms, you can lower your monthly payments to a price point you can afford.
Understand the contract
Before signing the lease agreement, ensure you understand all the terms. This includes the length of the lease, the total cost, the mileage limit and the wear and tear policy. If you're unsure about anything, ask the dealer for clarification. Knowing what you're agreeing to before signing the dotted line is crucial.
Frequently Asked Questions
We answered some frequently asked questions to help you gain valuable insight about car leasing and avoid common mistakes that can potentially cost you.
About Christopher Boston
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