Chapter 1B: Pitfalls of Leasing a Car
10 Errors to Avoid When Leasing a Car
One-third of the new car market is made up of leases. Leasing cars has gained popularity over the years because buying a new car upfront is costly. The cheapest way to get your hands on a new car is through leasing. Make sure to read the fine print before signing off on a lease deal because there may be some hidden expenses in there. Here are 10 common mistakes to avoid when leasing a car.
1. Not purchasing gap insurance
Gap insurance is an important part of lease insurance. The difference in what you still owe on your lease and the value of the car is considered the “gap.” Your contract may say that at the end of the lease, you can buy the vehicle for let’s say $10,000. This is the car’s residual value.
Accidents happen and if you total your car, or get in a collision, the insurance company will determine the value of the vehicle and you will have to pay a large chunk out of pocket if you don’t have gap insurance.
It is important to see if the contract includes gap insurance coverage before you sign your lease. Paying extra to get it or looking for a vehicle with a lease plan that includes gap insurance is an important precaution to take.
2. Paying too much upfront
Often times, there are lease deals advertised with low monthly payments on new vehicles that require paying thousands of dollars upfront. However, this money pays for a portion of the lease costs beforehand.
3. Not maintaining upkeep of the vehicle
Wear and tear is normal. However, it is important to understand what the lease says about acceptable potential damage to the vehicle. When it’s time to return the car to the dealer, additional fees could apply if you don’t read the contract carefully.
It all depends on if the leasing company thinks the damage is excessive, and what they consider to be normal. If the vehicle gets a scratch but the mark is smaller than the size of a business card or driver’s license, some companies may consider it normal. Remember, the definition of “normal” can differ from dealer to dealer.
When you turn the car back in, the lessor will look for dents and scrapes on the body and the wheels. They will also look for damage on the windshield and windows, as well as wear and tear on the tires and stains on the upholstery. Assuming the inspector will be lenient is not the most practical way to go about this. If the vehicle is damaged heavily, the driver should expect repairs to cost as much as full market prices.
4. Signing a lease with too little miles
You might see a lease with low monthly payments and this could be because it has a low restriction on the number of miles you can drive per year. Many leases have annual mileage limits of 10,000 to 15,000 miles. Exceeding these limits results in potential charges up to 30 cents per over-the-limit mile by the time the lease is over. Let’s say you exceed the mileage limit by 3,000 miles. This could result in you owing $900 (at 30 cents per mile) for a vehicle you no longer lease.
Understanding your driving habits is essential when leasing a car. Asking about higher mileage limits is always a good idea if you think you will be driving more than the agreement allows. This will most likely result in an increase in your monthly payment. You could also add these mileage payments monthly to cover the costs and avoid a large fee at the end of the term.
5. Leasing a vehicle too long
Most car leases are three years long, but some can go longer. If you lease for too long, it is possible you can end up paying extra for repairs and maintenance. Make sure the lease period is either shorter than or matches the car’s warranty period. On average warranties last three years which is about 36,000 miles, but they can vary from lender to lender.
Maybe you want to keep the car longer than the warranty period. At this point, you should consider an extended warranty. While you are making monthly payments, you will also be responsible for maintenance and repairs for a vehicle you don’t own. Buying the car is probably a better option if you plan on leasing it for a long time. If the driver owns the car they are repairing and maintaining, these investments will last them years so when they sell the car, it will benefit them and they will get their money’s worth.
Overall, if you think you want to lease for a long time, you should probably buy the vehicle. However, you can use Bankrate’s calculator to see if leasing or buying will save you more money in the long run.
6. Not knowing your credit score
Before talking to a lease dealer, it is critical to know your credit score. The cost of a lease you are looking at can change dramatically based on your credit score. Understanding where your credit score is at is important to know how far you can push on lease negotiations.
The most manufacturer supported and best lease deals are offered to those with outstanding credit. It is important to know your score ahead of time so you can fix any errors and spend some time improving your score before negotiating a lease.
7. Not reading the documents thoroughly
In a lease deal, you are required to sign many complex documents reading each one carefully is important to ensure there are no additional hidden costs. It may only be a couple of dollars per month, but these costs can add up. Sales taxes and registration on your vehicle should be included in your monthly lease payments. If you have any questions about the costs involved, you should check in with your tax advisor.
8. Don’t crack under pressure
The car salesman will try to sell you a lease at a higher price. The salesman will benefit and your bank account won’t. They will make more money if they do this, and it is entirely in their interest, not yours. The salesman will try to trick you into thinking you are getting the best deal of your life, and it’s foolish to believe them. Not all salesmen are bad, but they will try to manipulate you by using sentiment and empty promises. Make sure you do your homework and know what you are getting yourself into before signing any contracts and making commitments.
9. Look out for balloon payment financing
Balloon payment financing is something you should look out for when financing a car. They are often presented as a lease or similar alternative but it is actually a very different contract. They consist of a number of small payments and a large payment at the end, unlike normal financing.
They can look like a lease because of the low monthly payments, but once the contract ends, you are obligated to pay the rest of the loan balance. Balloon financing is easy to spot because instead of using leasing terminology, they will use financing terminology such as interest rate instead of the money factor. In the contract, these terms will be clearly labeled.
The drawback of balloon payment financing is that it puts all the risk on the buyer instead of the leasing company, just like an open-end lease. Dealerships usually don’t offer balloon payment financing for people who can afford leases and maintain a good credit score. Dealers will offer this as an alternative to a lease but even then, balloon payment financing is rarely a good option.
10. Lease Term and Warranty term
Sometimes when you’re leasing a car, the warranty term is shorter than the lease term. One of the attractions of leasing is the fact that the car is under warranty the entire time you lease it.
Sometimes it makes sense to lease a car for longer than the warranty term, but make sure that you look out for expenses like major repairs and other problems once the warranty term expires.