Car Leasing Traps You Should Avoid

The residual value is the amount the car is worth at the end of the lease. Your monthly payment is based on this residual value. Shutterstock

On the surface, leasing looks like an inexpensive way to have a nice car you couldn’t normally afford. Or, maybe you want to enjoy a new car every few years. Regardless of your reasons, you would be wise to enter a leasing deal with your eyes wide open.

With new vehicle prices rising, manufacturers are offering fewer leasing incentives. It doesn’t mean leasing is a bad deal; it just means you must be vigilant. There are some pitfalls to leasing a car.

Paying Full Price for the Lease

The dollar amount the lease is based on is called the “capitalized cost” or “cap cost,” and you can negotiate that. If you can convince the dealer to lower the cap, you’ll have a lower payment and less money due at signing.

You can also negotiate the mileage. Don’t forget to haggle over dealer’s fees, your trade-in, and the cost of any add-ons.

Not Researching Residual Value

The residual value is the amount the car is worth at the end of the lease. Your monthly payment is based on this residual value.

For example, if your car is worth $50,000 and the dealer estimates it will be worth $25,000 in three years, your monthly payments will be calculated to cover the $25,000 in value loss.

If the vehicle you’re leasing historically has a higher residual value, your payments will be lower. But your monthly payment will be higher if the dealer estimates the residual value to be lower than what usually happens with that vehicle.

Research the value and depreciation of the car you’re considering leasing. Ask about the residual value. If this value is lower than what historically the car has been at, you might want to walk away.

To avoid high payments, choose a car that holds its value.

Not Knowing How Much You Drive

The average American drives 14,263 miles per year. But the average lease runs between 10,000–15,000 miles per year. That’s cutting it short. If you go over that amount, it will cost you. It will also cost you if you go under.

For example, a 36-month lease that allows you 10,000 miles per year may have a $0.20 per mile charge for every mile you go over the limit. That doesn’t sound like too much. But if you drive 13,000 miles per year, the overage will cost you $700 per year or $2,100 at the end of the lease.

If you drive under 10,000 miles, you’re not given a credit for driving conservatively. You'll end up paying for depreciation that you didn’t use.

Analyze your driving habits and determine how much mileage you'll probably need. Remember that this may be negotiable.

Not Knowing the Car’s Total Cost

Compare the true lease’s cost to ensure you’re receiving a good deal over the lease’s lifespan. Don’t just look at month to month.

To ensure your deal is a good one, multiply the number of payments minus one for the total lease. Then add that amount to the money due at signing and any extra fees. That total is the actual cost of the lease.

For example, if you have a lease for $359 per month for 36 months, you would multiply the payments by 35. (The first payment is rolled in with the amount due at signing, so you don’t want to count it twice.) That total is $12,565.

You then add that total to the signing amount. If the signing amount was $3,000, the total lease price of the car would be $15,565. That’s the amount you should look at and compare with other leasing opportunities.

Not Having the Right Insurance Coverage

It’s important to have Gap insurance. It covers the difference between what you owe and what the car is worth.

When leasing a car, the leasing agent owns it. If the car was totaled and you had gap insurance, the insurance company would pay your leasing agent the difference.

But if you don’t have gap insurance, you must pay the leasing agent. Otherwise, you'll be paying for a car you can no longer drive.

You might be required to have gap insurance when you lease, but ensure you go to your own agent for it. A dealer will sell it to you, but it will be at a premium.

Falling for an Advertised Price With Large Down Payment

You may see a Lexus lease for $300 per month, but what is the down payment? These low prices usually translate into a large down payment. You could lose, big, if you put a large down payment on a car and it’s totaled shortly into the lease.

Circle back and calculate the total cost of the car.

Not Reading the Wear-and-Tear Definition

Read the fine print. What is considered normal wear-and-tear? Will it cost you if you lose equipment or there’s a small scratch on the bumper?

You also should check on what repairs and maintenance you’re responsible for.

Beware When Leasing

Leasing a vehicle is a viable option, but ensure you do your research. Don’t compare monthly payments as much as comparing the total lease cost.

It’s imperative that you know your driving habits so you don’t exceed the designated mileage per year. If you do, it could cost you hundreds of dollars.

Your best course of action may be to take your total lease price and shop around.

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