Leasing a car is a great way to continue driving a new vehicle with the latest comfort, safety, and connectivity features. However, you have to be smart when you are leasing a car. It's a more complicated transaction than merely buying a vehicle. It is too simple to make costly mistakes. Here are just a few easy-to-make and avoidable car leasing mistakes.
Understanding How Leasing Works
When leasing a car, be sure to read the fine print before you sign that contract. While a car lease typically offers lower monthly payments, it can be extremely costly when you are not sure what you are doing.
With leasing, you are theoretically only paying for the depreciation that occurs over your lease term, plus fees and interest. So while this sounds simple enough, it can be far more complicated in practice. If you have never done this before, leasing can be a bit tricky.
When you purchase a new car, you need to pay (whether by cash or loan) the total price of that car. When you lease a vehicle, however, you are only paying the difference between the cost of the vehicle and its expected value once your lease is up, plus fees and interest.
So, if you want to lease a car that is $40,000 and it's expected value after three years is $30,000, you will only need to pay the expected depreciation — $10,000, plus fees and interest. If you were to purchase this same car, you would have to pay the entire $40,000, plus additional charges and interest.
When your lease is up, you return the car to the leasing dealer. You might or might not have some lease-end costs which depend on the amount of security deposit you put down when you signed the lease. At this point, you will have the option to either:
- Buy the leased car
- Lease another new car
- Walk away
Keep this in mind; a lease is a contract you typically cannot easily break without having to pay some potentially significant penalties. When you buy a car, you can sell it at any time without penalty. That typically cannot be done with a leased car.
Negotiating the Deal
Many individuals believe the sticker or lease price of a car is what determines the lease price. Typically, this is not the case unless you are taking advantage of a subsidized lease deal through the manufacturer. When leasing a car, you definitely can negotiate the best price, and you should.
In leasing terminology, the term 'capitalized cost' refers to the purchase price of the vehicle. If you can negotiate a lower capitalized cost, you can reduce your upfront payment, monthly payments or both.
You can also negotiate other things like the:
- Value of any trade-in
- Interest rate, or 'money factor' used to determine payments
- Mileage cap (which sets a limit on how many miles you can drive before being penalized)
- End-of-lease purchase price
Other things you need to factor in when leasing a car are:
- GAP insurance: A leased car loses value the minute you drive it off the dealer's lot, just like a purchased car. If your car is stolen or gets totaled in an accident, your insurance provider pays for the car's value, and you would have to pay the difference of what you agreed in your contract to pay over your lease term. GAP insurance helps to pay this difference.
- Maintaining the car: If the leased car has damage that is more than regular wear-and-tear, you may be looking at additional fees when you bring it back to the dealer.
- Annual mileage: Most leases have limits on how much mileage you can put on the car. If you drive over this limit, you will likely have to pay per mile of overage. If you are not careful, this could add up substantially — to thousands of dollars. Alternatively, you might have to purchase the car outright.
Deciding to lease a car rather than buy one is the perfect way to be able to drive a newer car while paying less money each month. Just remember the leasing risks that could have you paying more in the long run, defeating the purpose of leasing. Keep the above factors in mind, and read the fine print of your lease contract before you sign to ensure you lease a car that is right for you and within your budget.