8 Car Leasing Mistakes to Avoid
When you lease, you’re never more than a few model years away from the newest and best upgrades. You’re always under full warranty so you never have to worry about big repairs and maintenance costs are low. Then there are the real savings, which come in the form of lower upfront costs and much lower monthly payments over time.
But that’s if you do everything right. Just like buying a car, signing a lease is a huge commitment that requires preparation and strategic planning–there’s plenty that can go wrong. To get the lowdown on the biggest car leasing mistakes you want to avoid, GOBankingRates spoke with Matt DeLorenzo, senior managing editor of Kelley Blue Book’s. Read on to make sure you get the best deal on your next lease.
Mistake: Not Negotiating the Price
When leasing a car, people often forget to negotiate the cost of the vehicle, also called the capitalized cost. Instead, they focus on reducing monthly payments or lease terms. That is a mistake that can cost you thousands of dollars.
Some leases subsidized by the manufacturer have specific terms, said DeLorenzo, but most leases are completely negotiable. Just as you would if you were buying a car, do research on Kelley Blue Book, Edmunds, or another website to determine a fair price for the car. Then, use your research as a platform for negotiating.
You can research and negotiate the predetermined worth of the vehicle at the end of the lease term. This is also called the residual value. Knowing the residual value will go a long way in protecting you at the end of your lease, and help you lower your monthly payments.
“You can negotiate on lease terms, length, down payment,” said DeLorenzo, “and also if you have a trade-in, which will materially affect the price you pay.”
Mistake: Underestimating the Amount of Miles You’ll Drive
Most leases will have a per-year mileage cap of 12,000 miles, which can tick by pretty quickly. Some leases have a cap of 15,000 miles, which will result in slightly higher monthly payments or upfront costs, said DeLorenzo. But if you think you may exceed the cap in your car lease, you probably will, and paying for the miles up front will be less expensive than paying for them when you turn the car in.
When you pay up front, miles generally cost between 10 and 25 cents each. Assume miles cost you 15 cents, and you opt for a 20,000-mile cap. On a three-year lease, you will have 24,000 extra miles, or 8,000 per year, which will cost you $3,600. If, on the other hand, you take a lower cap and go over your limit, you could be out more money at the end of the lease, said DeLorenzo. For instance, if you are charged 25 cents per mile at the end of your lease, those 3,000 miles will cost you $6,000.
Believe it or not, most dealers will refund you for any unused miles if you pay for extra miles up front. And remember, you cannot decide to buy extra miles after your lease begins. So the time to be realistic is before you sign your lease, not after.
Mistake: Not Having Gap Insurance
As you might know, the minute you drive a car off the lot, whether you bought it or are leasing it, its value begins to drop. In fact, said DeLorenzo, much of a car’s depreciation comes in the first two years.
“If the car is totaled, not just in an accident, but say a tree falls on it, you could be liable for the difference between what the insurance company says it’s worth and what the lessor values the car at,” said DeLorenzo. Depending on the car, that could cost you thousands of dollars.
This is where gap insurance comes in. If you have it, the insurance company pays for the difference. If not, you pay out of pocket. “Gap insurance is one way to minimize your out-of-pocket expenses in case you have to replace your car,” said DeLorenzo.
Mistake: Not Maintaining Your Leased Car
You might be tempted to skip routine maintenance and neglect minor dents and dings because you plan to walk away from your leased car at the end of your term. But that can be a big mistake.
“It is doubly important to maintain your car to factory specs because in the lease language there is a clause that goes along with excess mileage and refers to excess wear and tear,” said DeLorenzo, “Usually, there is a post-lease inspection … some lessors may look at excess wear and tear as a way to extract more money from you at lease end.”
DeLorenzo strongly advised keeping your car maintained and fixing even small scratches and dings as a way to protect yourself against big charges when you turn your car in.
Mistake: Signing Up for a Long Car Lease
One of the benefits of leasing a car is that you have the option of turning it in before it develops common problems that come with age, like failing brakes, balding tires and other issues. That’s why typical leases are in the two- to three-year range, said DeLorenzo. A huge benefit to you is that most cars have bumper-to-bumper warranties that run for three years or 36,000 miles.
But if you take out a four- or five-year lease, you’re risking “owning” the problems of the car without the benefit of owning the car itself. You could get an extended warranty of course, but that will cost extra. That’s why DeLorenzo advised against long leases.
“If you’re going to lease a car for five years or more, you might as well buy it. The payments won’t be that much higher, and you will have the benefit of owning the car once the loan is paid off,” he said. Long leases just don’t have enough of an upside for all the potential down sides. Keep your lease short.
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Mistake: Not Getting Enough for Your Trade-In
If you’re moving from a car you own to a lease, then you can trade-in. And just like buying a car, it’s important to bargain hard for the trade-in value of your old car. It could make a significant difference in your payments.
“Check the value of your trade-in on sites like KBB.com. Once you have a value, you can determine whether or not you’re getting a good deal,” DeLorenzo said. “It might be a good idea to try to sell the car on your own and get into a lease with a low or no down payment.” And if you own your car and trade it in for the lease, it should affect the monthly payments or reduce or eliminate the upfront costs.
To avoid any running around, DeLorenzo offered a final piece of advice: “It’s always best to negotiate a deal, and then introduce the idea of a trade-in to see how the terms change as a result.” Remember, your trade-in should work just like cash.
Mistake: Not Reading the Fine Print
Reading the fine print is vital, no matter how tedious the task might be. “This is so important, especially when it comes to lease termination. Oftentimes there are early termination fees if you try to get out of the lease early. And pay attention to the upfront payment, the residual value and how they relate to the monthly payment,” said DeLorenzo.
Most leases are closed-end, meaning you simply turn the vehicle in at the end of the lease. Sometimes you have the option to buy the car for the predetermined residual value. DeLorenzo said that could be a good deal, if you’ve put low miles and low wear and tear on the car.
But if your lease is open-end, be sure it will work for you. It might have lower payments, but you run the risk of owing money if the value of the car is determined to be below the residual value at the end of the lease, said DeLorenzo. “Again, pay attention to mileage caps and excess wear and tear fees that may be imposed at lease end.”
That information is all going to be in the fine print. So get out your magnifying glass and take on a small headache now to avoid an even bigger one later on.
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Mistake: Misunderstanding the Pandemic’s Impact
When the auto market collapsed at the start of the crisis, the industry responded with incredible incentives for just about anyone looking to lease or buy a car. It was clear that most of those deals couldn’t and wouldn’t last forever, and most of them didn’t. It’s important for new lessees to understand that while there are still deals to be had, the cash and financing bargains they heard about through most of 2020 are mostly off the table now. Some dealers are still offering lease extensions, particularly as part of any hardship relief programs they’re still maintaining. Others are even allowing lessees to exit their current leases after only two years to enter into a new one. In rarer cases, leasing companies are extending offers of deferred payments, but those are mostly on a case-by-case basis where hardship can be proven.
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Andrew Lisa contributed to the reporting for this article.
Last updated: Jan. 13, 2021