Leasing a car is an easy and inexpensive way to have a new car to park in your garage. It gives you a vehicle to drive for a fixed number of months and miles. It’s like renting an apartment instead of buying a house but in a car sense. It gives less long-term commitment involved, but you still have to pay for it. At the end of your lease contract, you’re free to lease another new car or buy the car you may have grown to love.
More and more people are turning into leasing, and about a third of new cars hitting the road today are leased instead of purchased. Car leasing definitely has benefits and has its ins and outs, but you don’t want to end up emptying out your bank account because you made a simple mistake. Here are some common car leasing mistakes people make and how to avoid doing them if you plan to lease a car yourself:
Not knowing how leasing works and not understanding its terminology
The monthly payments in a lease comprise of principal and interest. The principal is the actual payment for the car on its value of depreciation over time, and the interest rate is based on your credit score. Make sure you familiarize yourself with how the value of a specific car depreciates over time, so you can get the best car that will pay less monthly. Research the vehicles and their values before deciding on which one to lease.
Lease agreements are not written in plain language. It uses legal terminology that’s meant to be clear and precise in a court of law in case there are disputes. It’s not intended to be clear to most normal beings just trying to drive a new car home.
Before you head to a dealership to sign the paperwork, do your research. Search the Internet to learn about leasing terminologies, and ask friends and family who have leased vehicles what terms to look for and what they mean.
Not buying gap insurance
If you drive a leased car, you must pay for gap insurance. Gap insurance covers the difference between what the car is worth and what you owe if it’s totaled in an accident or got stolen. When you lease a car, the leasing agent is the owner of the car. If it gets into an accident and is declared a total loss, the gap insurance payout would go to the owner or the leasing agent.
Without gap insurance, the consumer is liable to pay the difference between the value and the agreed-upon lease term payments. The insurance company will reimburse the dealer for the value of the car, but the dealer will still want to receive money that was agreed upon in the lease term. Without gap insurance, you will need to pay that difference or a gap.
Underestimating your mileage
The included mileage limit is one of the things you can negotiate in a lease. When you’re starting a lease, the amount of miles you can put on the car is predetermined. Most of the time, dealers will suggest limits of 10,000 to 12,000 or even 15,000 miles a year. If that’s how much you drive, then great. If you exceed the mileage limits, you will be charged up to 30 cents per additional mile. For instance, if you exceed the mileage limit by 5,000 miles when you turn the car by the end of the lease, that’s already $1,500 additional payment.
To avoid hefty extra charges, know your driving habits before leasing a car. Consider the distance of your daily commute and how often you take long trips. On average, Americans drive about 13,500 miles a year. So if you know you’ll probably drive more miles than the agreement allows, ask for a deal with a higher mileage limit. Your monthly payments might increase, but it’s still less expensive to buy extra miles beforehand.
Leasing a car for too long
Most cars have a manufacturer’s warranty that lasts between two to three years. Coincidentally, most lease terms last between two to three years. If you lease a car, make sure the lease period either matches or is shorter than the car’s warranty period.
If you keep the car longer than its warranty period, you may want to consider getting an extended warranty. Otherwise, you will be paying for maintenance and repair costs for a car you do not own while still making monthly lease payments. Also, there’s no reason to lease a car for more than three years. If you really want to use the vehicle long term, just buy it.
Paying too much money upfront
You may have lesser monthly expenses if you paid a large downpayment, and that amount covers a portion of the lease in advance. You may think it’s advantageous for you, but there’s too much risk involved with paying a large downpayment.
For example, if the car is wrecked or got stolen within the first few months, the dealership will be reimbursed for the damages. While the consumer will not be held liable for those damages, the money you paid in advance will likely not be refunded to you. You’ll have no car, and that upfront money you gave to the leasing company will disappear.
So how much should you pay for the downpayment? It’s actually possible to put nothing down on a lease, then make monthly payments a little more expensive. However, not all dealerships allow that. Your best bet is to spend no more than $2,000 upfront when leasing a car. Dealers will definitely try to convince you to make a larger downpayment, stating that it will be less expensive in the long run. But be strong – it’s not worth the risk. If something happens to the car before the end of the term, at least the leasing company won’t have a big chunk of your money.
Not negotiating the price
When leasing a vehicle, people often forget to negotiate the price of the car. MSRP stands for manufacturer’s suggested retail price, and suggested means you can negotiate the price of the car you’d like to lease. The amount of the lease is called “capitalized cost” or “cap cost,” where you can negotiate to make the price lower. However, this doesn’t apply to advertised deals, which are typically arranged in advance. The automaker subsidizes the dealership’s lease, so the dealers can offer it without taking too much of a hit.
Research and negotiate the worth of a specific car at the end of the lease contract. Research before showing up in the dealership. This will help you go a long way in protecting yourself at the end of the lease.
Not negotiating everything
Negotiating is one of the most important aspects you have to practice and master when leasing. Don’t just negotiate the price and the monthly payments – the dealer will most likely expect that. There are many things to negotiate when you’re in a deal-making zone. You can try to negotiate the dealer’s fees, the value of trade-ins, and the cost of many add-ons. You can negotiate even the mileage cap.
Don’t assume that an aspect of the deal is non-negotiable because it isn’t mentioned. Ask questions. Be annoying and persistent. However, don’t offer your personal information right away. Your sales representative is on a need-to-know basis, and most of the time, they don’t need to know. Keep your emotions in check and be ready to push as a sales rep is trained to be always ready to push back. If you keep your cool, you will eventually make your sales rep agree with your terms. In the end, their goal is to sell a lease, and a deal with a lesser income is better than nothing. Use that to your advantage, but don’t act desperate.
Not knowing your credit score
Sometimes, a car salesperson may try to assume that you have bad credit so they can charge more. Your credit score makes a big difference in relation to the downpayment, monthly payments, and interest rate. The best deals and unbelievable offers you’ve ever seen in ads are for people with excellent credit. If that’s you, that’s fantastic – but if it’s not, don’t worry, for you can still get a lease at a reasonable price. However, in some cases, your credit score may prevent you from being able to lease a car at all.
Just make sure you won’t be fooled by a salesman that you have a worse credit score than you already have. Figure it out well before stepping foot in a car dealership. Many credit card companies offer it as a free service to their members. Beware if you’re looking it up online, as some websites might offer credit score information in return for your personal info and will use it to try to sell you financing. If you have a great credit score, don’t wave it around and brag about it – only bring it up when it’s relevant and if you’re considering making a deal.
Not reading the fine print
It’s easy to focus on the monthly payment since that’s the amount that will come out of your bank account every month. But don’t focus on that amount only that you miss the add-on costs that might be tacked on to your lease.
Reading the fine print is also essential, especially when it comes to the termination of the lease. Often, there are fees if you like to terminate the lease early. Also, pay attention to the upfront payment, the residual value, and its relation to the monthly payment.
The fine print will also indicate if the lease is a closed-end agreement (meaning, you will simply turn the car in at the end of the lease) or an open-end deal, which gives you an option to buy the car for a predetermined residual value. The latter one is a good deal if you have put in low miles and low wear and tear on the car. The open-end lease will make you at risk of owing money if the car’s value is determined to be lower than the residual value at the end of the lease.
You’ll also want to know how leases are taxed in your state or area. In some cases, you need to pay the tax for the entire capitalized cost of the car, which is the amount that your lease is based on, rather than the amount you’ll be paying over the next few years.
All this information will be in fine print, so make sure you read it thoroughly and endure a small headache now to avoid a bigger one later on.
Not maintaining the car
After establishing and negotiating the fine print, make sure you keep up with it. Some people say you can drive your leased car as you stole it, but the reality is you have to drive it as you own it. You may even want to drive it more kindly than you would a car you own. Remember, it’s like renting an apartment – you must pay for the damages you incur.
If your car gets a scratch, but the mark is less than the size of a business card, many car dealerships consider it normal wear and tear and probably won’t charge a penalty. If the leasing company considers the damage excessive, it can charge additional fees.
The dealer may not explain how expensive it is when there are little scratches or dents, so ask it before signing the contract. Oftentimes, it’s less expensive to deal with the small things yourself, rather than bring it back to the leasing company with damages.
The definition of regular use may vary from dealer to dealer, and once you turn in the car, your lessor will inspect it for dents, scrapes, damages, tears, or strains in all parts of the car. Don’t assume that your inspector will be lenient.
If you’re wondering, “can you modify a leased car?” read here. Your leasing company probably won’t agree with customizing or improving any part of the car, like the engine or the sound system, and they will probably charge you to remove the entire system.